(b) You have been offered the opportunity to purchase a start up company building electric cars...

(b) You have been offered the opportunity to purchase a start up company building electric cars for the Australian market called Green Motors P/L. Your initial investment is $22,000,000. The term of the project is 5 years. The project has an expected rate of return of 10% pa. All expected cash flows for the project are below and you have an expected rate of return of 10% pa.

End of year	Cash flow ($mil)
1	1.8
2	3.0
3	6.5
4	8.4
5	12.3

(i) Based on your required rate of return would you purchase this investment? Present all calculations to support your answer. (2.5 marks)

(ii) Would you change your opinion from (i) if the expected rate of return rose to 15%? Present all calculations to support your answer. (2.5 marks

Expert Solution

i)

To know if this is a suitable investment, we have to calculate the net present value of the investment at an expected rate of return of 10% per annum.

Net present value of the investment = $373,894

The investment should be purchased because the net present value is positive

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ii) If the expected rate of return rose to 15%, we have to calculate the net present value at 15% expected rate of return

Net present value of the investment = - $2,974,495

At an expected rate of return of 15% the investment should not be purchased because the net present value is negative.

jeff jeffy answered 7 months ago

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