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What is the NPV for a project if its cost of capital is 0 percent and...

What is the NPV for a project if its cost of capital is 0 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?
Select one:
a. $6,700,000
b. $137,053
c. $1,700,000
d. $371,764

Which of the following is TRUE?
Select one:
a. The Gordon model assumes that the value of a share of stock equals the future value of the current price of share that it is expected to remain constant over an infinite time horizon.
b. The marginal cost of capital is a relevant cost of capital for evaluating a firm's future investment opportunities.
c. The Gordon model is based on the premise that the value of a share of stock is equal to the sum of all future dividends it is expected to provide over an infinite time horizon.
d. The cost of retained earnings will always equal the cost of preferred stock.

Please Solve As soon as
Solve quickly I get you two UPVOTE directly
Thank's
Abdul-Rahim Taysir

Solutions

Expert Solution

First Question :
As the cost of capital is zero, there will be no discounting of the future cash flows
The NPV will be the sum of all positive cash flows less the initial investment.
Year After Tax operating Cash flows/(Cost)
Calculation of NPV Year 0                                         (5,000,000)
Year 1                                           1,800,000
Year 2                                           1,900,000
Year 3                                           1,700,000
Year 4                                           1,300,000
Total                                           1,700,000
NPV is $1,700,000

Ans c is correct.

Ans 2.

Option a. is FALSE as Gordon's model assumes that the stock price is equal to the present value of all the future earning obtainable from a stock , not the future value of current price which will remain static over a time horizon.

Option b. is TRUE. The Marginal cost of Capital is the cost of the additional capital that is needed to fund a future project. Therefore the marginal cost is relevant for evaluating a future investment opportunity.

option c is FALSE. The Gordon Model is based on the premise that the value of a stock is the PRESENT VALUE of all the future dividends that the stock will earn not the value of future dividends it will earn.

Option d. is FALSE: The cost of retained earning is approximately the same as the cost of Equity or expected return required by the Equity investors , not equal to the cost of preferred stoc.

So the Option b is only TRUE.

jeff jeffy answered 2 years ago
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