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QUESTION 2 Cash Flow Analysis (10 marks) You are considering a 5-year investment project which is expected to cost $1,000,000. In each year, you have decided that there are 3 possible states of the economy: good, average, and poor. In each individual year there is a 30% chance of the economy being good and a 20% chance of it being poor. You forecast the following net cash flows for the project: Economy Year 1 Year 2 Year 3 Year 4 Year 5 Good 350,000 400,000 320,000 275,000 300,000 275,000 225,000 250,000 175,000 Average Poor 325,000 200,000 180,000 270.000 250,000 150,000 (a) What is the expected net cash flow each year? (3 marks) Hint: Do some research on how to calculate expected cash flow given probabilities in each scenario. You have arranged the following sources of funding: (0) $200,000 from a 5-year fixed interest loan whose annual loan payments are $48,000. (ii) $250,000 from a 5-year zero-coupon bond with a face value of $400,000. (iii) $300,000 from an ordinary share issue where a dividend of $18,000 will be paid in one year and it is expected to grow at 3% per annum. (iv) $250,000 from a 5-year coupon-paying bond issue whose coupon rate is 7% and face value is $300,000 Hint: you might need to use spreadsheet to solving some parts of this question. (b) what is the discount rate given above sources of financing? (5 marks) Hint: The discount rate should be the weighted average cost of capital. (e) What is the NPV of this investment project and should you invest in this project? (2 marks)

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