Question
In: Finance
What is wrong with using the cost of the specific capital used to finance a project...
What is wrong with using the cost of the specific capital used
to finance a project as
the discount rate in relation to that project?
Solutions
Expert Solution
Before investing in any project, it is significant to evaluate whether the project would be economically beneficial or not. The best way to evaluate this is comparing the Initial Cash out flow of the project with the Discounted cash flows likely to be received from the project over the life of the said project.
Now, the most important factor in this evaluation is to ascertain the proper Discount Rate. Considering the cost of capital used to finance the project and discounting the future cash inflows with this rate shall give the best picture about economic viability of the project.
Overall cost of capital represents the cost running routine business activities. Whereas, Specific cost of capital represents the true cost for the specified project. If the cost of specific cost used to finance the project is high, then it will require higher cash inflows to accept the said project and vice versa.
jeff jeffy answered 5 months agoRelated Solutions
“It is argued that the capital asset pricing model can be used to calculate a project-specific...
“It is argued that the capital asset pricing model can be used
to calculate a project-specific cost of capital for firms.” Analyse
the statement above with reference to the key concepts of
systematic risk, business risk and financial risk. Relevant
examples or illustrations should be given.
What is the appropriate cost of capital for the project?
Empress Inc. has issued a bond with a face value of $1,000 and
an interest rate of 13% to fund a new project. The bond is secured
by the cash flows from the project, which will be $950 with a
probability of 60% and $1,200 otherwise. Assume risk
neutrality.What is the appropriate cost of capital for the project?
If government bonds are sold at a premium to finance a capital project, what is the...
If government bonds are sold at a premium to finance a capital
project, what is the important question for the premium? Discussing
proper accounting for bond installments in the Capital Projects
Fund, Debt Service Fund, and data at the government level, assuming
that the premium should be reserved for debt servicing
a project has a cost of 10000$ and the cost of capital is 12% what is...
a
project has a cost of 10000$ and the cost of capital is 12% what is
the net present value given that the cash flow from the project of
next four years is 3500$ each year
What is an example of a specific capital project fund? Give an example of the journal...
What is an example of a specific capital project fund? Give an
example of the journal entries to record it.?
What are the implications for a firm that selects the wrong project?
What are the implications for a firm that selects the wrong
project?
Using a cost of capital of 13%, calculate the net present value for the project shown...
Using a cost of capital of 13%, calculate the net present value
for the project shown in the following table and indicate whether
it is acceptable, LOADING.... The net present value (NPV) of the
project is $
Initial investment -1,151,000
Year Cash inflows
1 84,000
2 136,000
3 192,000
4 255,000
5 318,000
6 382,000
7 277,000
8 100,000
9 42,000
10 25,000
Using a cost of capital of 11%, calculate the net present value for the project shown...
Using a cost of capital of 11%, calculate the net present
value for the project shown in the following table and indicate
whether it is acceptable,
Initial investment
(CF 0CF0)
negative $−$1149
Year
(t)
Cash inflows
(CF Subscript tCFt)
in thousands
1
$8080
2
$130
3
$189
4
$256
5
$312
6
$376
7
$280
8
$102
9
$42
10
$20
The net present value (NPV) of the project is
$-75,817.60. (Round to the nearest cent.) Is the project
acceptable?
Using a cost of capital of 11%, calculate the net present value for the project shown...
Using a cost of capital of 11%, calculate the net present value
for the project shown in the following table and indicate whether
it is acceptable
Initial investment
(CF 0CF0)
-$1149
Year
(t)
Cash inflows
(CF Subscript tCFt)
in thousands
1
$80
2
$130
3
$189
4
$256
5
$312
6
$376
7
$280
8
$102
9
$42
10
$20
Using a cost of capital of 15%, calculate the net present value for the project shown...
Using a cost of capital of 15%, calculate the net present value
for the project shown in the following table and indicate whether
it is acceptable
Initial investment $-1,145
Year Cash inflows
1 $76
2 $132
3 $185
4 $256
5 $316
6 $383
7 $277
8 $98
9 $43
10 $25
The net present value (NPV) of the project is $_____
Please show all work and what inputs would be in a financial
calculator
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