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1.

So your new moderately risky 5-year project is costing $50,000 and will produce an annual free cash flows of $12,000 per year for the entire period, Assuming the riskiness revealed that the cost associated with financing and rewarding risk amounts to a charge of 12%:

a. would you accept the project? Give at least one rationale for your answer as done in class.

b. Would your answer change if the cost of capital falls to 9%? Explain fully.

c. How long will it take the investor to recoup your investing based on n-n-discounting cash flows?

2. a) Complete the following:

Capital Required $10M	A	B	C	D	E	F
A 10-year project	$M	Weights		Cost %	Weighted Cost (BT)	Tax = 30%
Financing	$Value				Column CxD	Weighted Cost (AT)
debt			0.40	9.0
preferred stock			0.10	7.0

(b) Suppose in question (a) above the WACC_AT is assessed to be 10% after factoring the risk element to your calculated % above. That is you calculated % + risk% = 10%

Assume also, that the Free Cash Flow from the project is estimated to be $1.2M annually over the 10-year period would you accept the project (use the Net Present Value)?

WHY?............................................................................................................................

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