Question

In: Finance

You are running a firm with the cost of capital of 8% and you have to...

You are running a firm with the cost of capital of 8% and you have to choose between two projects, A and B. Project A lasts six years and project B lasts eighteen years. The initial investments are $50M for project A and $65M for project B. Project A is going to generate $15M per year and project B is going to generate 12M per year. Both projects are renewable.

Which project would you chose? (Hint: Use equivalent annual annuity or replacement chain method to answer this question.)

Question 9 options:

A

B

Solutions

Expert Solution


Related Solutions

Imagine / assume you are running a merchandizing firm with a capital of $100,000-$500,000. You are...
Imagine / assume you are running a merchandizing firm with a capital of $100,000-$500,000. You are free to assume / invest within the range of $ 100,000 - $ 500,000, depending on the size of the business. With this assumption you are required to prepare an accounting cycle (Journal, Ledger, Trial Balance, Income statements and Balance sheet.) as per the GAAP System by applying all accounting principles and concepts. Further requirements: 1. Write down at least 20 transactions for a...
3. a) Suppose that a firm has a capital cost (r) of $8 and a labor...
3. a) Suppose that a firm has a capital cost (r) of $8 and a labor cost (w) of $4. Graph an isocost line associated with spending $1,000. On the same graph, draw another isocost line associated with spending $2,000. What are the slopes of these lines? b) Using our cost-minimizing (economic efficiency) condition, what is the optimal ratio of the marginal product of labor to the marginal product of capital for this firm? Why? Use a production isoquant on...
You are tasked with estimating the cost of capital for a firm. The risk-free rate is...
You are tasked with estimating the cost of capital for a firm. The risk-free rate is 4%, the expected rate of return on the market is 15.8%. Now, another similar company (similar unlevered cost of capital) has a debt-to-equity ratio of 1 to 3. It has a debt beta near zero and an equity market-beta of 1.5. Your own firm has more debt, for a debt-to-equity ratio of 1 to 1, with a debt beta of 0.1. What is a...
You are tasked with estimating the cost of capital for a firm. The risk-free rate is...
You are tasked with estimating the cost of capital for a firm. The risk-free rate is 3.2%, the expected rate of return on the market is 17.9%. Now, another similar company (similar unlevered cost of capital) has a debt-to-equity ratio of 1 to 5. It has a debt beta near zero and an equity market-beta of 1.1. Your own firm has more debt, for a debt-to-equity ratio of 1 to 1, with a debt beta of 0.5. What is a...
You are considering the following project. Your cost of capital is 8%. The cash flows are...
You are considering the following project. Your cost of capital is 8%. The cash flows are as follow: Year 0 1 2 3 4 -1000 300 500 300 300 What is the NPV of the project? A. 165 B. 296 C. 400 D. 1400
​(Individual or component costs of​ capital)  Compute the cost of capital for the firm for the​...
​(Individual or component costs of​ capital)  Compute the cost of capital for the firm for the​ following: a.  A bond that has a ​$1 comma 000 par value​ (face value) and a contract or coupon interest rate of 11.3 percent. Interest payments are ​$56.50 and are paid semiannually. The bonds have a current market value of ​$1 comma 125 and will mature in 10 years. The​ firm's marginal tax rate is 34 percent. b.  A new common stock issue that...
(Individual or component costs of capital) Compute the cost of capital for the firm for the...
(Individual or component costs of capital) Compute the cost of capital for the firm for the following: A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.8 percent. Interest payments are $54.00 and are paid semiannually. The bonds have a current market value of $1,130 and will mature in 15 years. The firm's marginal tax rate is 34 percent. A new common stock issue that paid a $1.77 dividend last year....
​(Individual or component costs of​ capital)  Compute the cost of capital for the firm for the​...
​(Individual or component costs of​ capital)  Compute the cost of capital for the firm for the​ following: a.  A bond that has a​$1,000par value​ (face value) and a contract or coupon interest rate of11.8percent. Interest payments are​$59.00and are paid semiannually. The bonds have a current market value of​$1124,and will mature in10years. The​ firm's marginal tax rate is34percet.b.  A new common stock issue that paid a​$1.79 dividend last year. The​ firm's dividends are expected to continue to grow at7.3 percent per​...
(Individual or component costs of​ capital)  Compute the cost of capital for the firm for the​...
(Individual or component costs of​ capital)  Compute the cost of capital for the firm for the​ following: a. Currently bonds with a similar credit rating and maturity as the​ firm's outstanding debt are selling to yield 7.57% while the borrowing​ firm's corporate tax rate is 30​%. b.  Ordinary shares for a firm that paid a ​$ 1.02 dividend last year. The dividends are expected to grow at a rate of 4.2 4.2​% per year into the foreseeable future. The price...
​(Individual or component costs of​ capital)  Compute the cost of capital for the firm for the​...
​(Individual or component costs of​ capital)  Compute the cost of capital for the firm for the​ following: a.  Currently bonds with a similar credit rating and maturity as the​ firm's outstanding debt are selling to yield 7.237.23 percent while the borrowing​ firm's corporate tax rate is 3434 percent. b.  Common stock for a firm that paid a ​$1.041.04 dividend last year. The dividends are expected to grow at a rate of 5.75.7 percent per year into the foreseeable future. The...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT