You have come across a project which has an initial investment ofINR5 crores. The EBIT expected...

You have come across a project which has an initial investment ofINR5 crores. The EBIT expected from this project is INR 1 crore in perpetuity, a more stable project with more predictability in the cash flows. Project risk is similar to the business risk of the firm’s core operations. The opportunity cost of capital to the firm if it was an all equity financed firm is 14.5%. The tax rate is 30%. Would you choose this project ?

Solutions

Expert Solution

EBIT = INR 1 crore

t = tax rate = 30%

Operating Cash Flows = EBIT * (1- tax rate) = INR 1 crore * (1 - 30%) = INR 0.7 crore

r = Cost of capital of firm = 14.5%

Present value of cash flows = Operating Cash flow per year / Cost of Capital

= INR 0.7 crore / 14.5%

= INR 4.8275862069 crore

= INR 4.83 crores

Net Present Value of the Project = Present Value of Cash Flows - Initial Investment

= INR 4.83 crores - INR 5 crores

= -INR 0.17 crores

Therefore, NPV of the Project is (-0.17 crores)

Project should not be selected since NPV of the Project is negative

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

You have come across a project which has an initial investment of INR 5 crores. The...

You have come across a project which has an initial investment of INR 5 crores. The EBIT expected from this project is INR 1 crore in perpetuity, a more stable project with more predictability in the cash flows. Project risk is similar to the business risk of the firm’s core operations. The opportunity cost of capital to the firm if it was an all equity financed firm is 14.5%. The tax rate is 30%. Would you choose this project ?...

Project Z has an initial investment of $54,769.00 . The project is expected to have cash...

Project Z has an initial investment of $54,769.00 . The project is expected to have cash inflows of $22,136.00 at the end of each year for the next 16.0 years. The corporation has a WACC of 12.76%. Calculate the NPV for project Z.

Project Z has an initial investment of $73,431.00 . The project is expected to have cash...

Project Z has an initial investment of $73,431.00 . The project is expected to have cash inflows of $29,499.00 at the end of each year for the next 13.0 years. The corporation has a WACC of 11.55%. Calculate the NPV for project Z.

Project Z has an initial investment of $92,000. The project is expected to have cash inflows...

Project Z has an initial investment of $92,000. The project is expected to have cash inflows of $25,000 at the end of each year for the next 13 years. The corporation has a WACC of 11%. Calculate the NPV for project Z.

Project Z has an initial investment of $87,000. The project is expected to have cash inflows...

Project Z has an initial investment of $87,000. The project is expected to have cash inflows of $21,000 at the end of each year for the next 15 years. The corporation has a WACC of 14%. Calculate the NPV for project Z.

Q1) A project requires an initial investment of $5,000. It is expected that the project will...

Q1) A project requires an initial investment of $5,000. It is expected that the project will last 3 years and generate net cash flows of $3,500 for each of these years. If the discount rate for the project is 10%, the discounted payback period for the project.is: Select one: a. 1.63 years b. 2.55 years c. 1 year d. More than 3 years Q2) Capital rationing refers to the limiting of capital resources to under-performing divisions. Select one: True False...

Project Z has an initial of $52,885.00. The project is expected to have cash inflows of...

Project Z has an initial of $52,885.00. The project is expected to have cash inflows of $25,325.00 at the end of each year for the next 19 years. The corporation has a WACC of 13.38%. Calculate the NPV for project Z.

caclulate the NPV for the project that has an initial investment of $20,000 with expected after-tax...

caclulate the NPV for the project that has an initial investment of $20,000 with expected after-tax operating cash flows of $125,000 per year for each of the next 3 years. However, in preparation for its termination at the end of year 3, an additional investment of $350,000 must be made at the end of Year 2. What is the NPV? the cost of capital is 12%. Please show all calculations in excel!

You are evaluating a project with the following cash flows: initial investment is $-23, and the expected...

You are evaluating a project with the following cash flows: initial investment is $-23, and the expected cash flows for years 1 - 3 are $12, $9 and $8 (all cash flows are in millions of dollars). What is this projects NPV? The company's WACC is 9%. Express your answer in millions of dollars, rounded to 2 decimals and without the dollar sign. So, if your answer is 23.5678, just enter 23.57.

You are evaluating a project (initial investment is $41,000) that is expected to produce cash flows...

You are evaluating a project (initial investment is $41,000) that is expected to produce cash flows of $5,000 each year for the next ten years and $7,000 each year for the following ten years. The IRR of this project is 12%. The firm’s WACC is 8%. What is the project’s NPV?

Subjects