Gomi Waste Disposal is evaluating a project that would require an initial investment of 46,300 dollars...

Gomi Waste Disposal is evaluating a project that would require an initial investment of 46,300 dollars today. The project is then expected to produce annual cash flows that grow by 2.59 percent per year forever. The first annual cash flow is expected in 1 year and is expected to be 6,500 dollars. The project’s internal rate of return is 16.63 percent and its cost of capital is 8.38 percent. What is the net present value (NPV) of the project? They are also evaluating a project that would last for 4 years. The project’s cost of capital is 7.43 percent; its NPV is 69,515 dollars; and the expected cash flows are 24,400 dollars at time 0, 22,790 dollars in 1 year, -36,790 dollars in 3 years, and X in 4 years. What is X? Their last project would cost 82,800 dollars today. The project is expected to produce annual cash flows of 2,620 dollars forever with the first annual cash flow expected in 1 year. The NPV of the project is -57,752 dollars. What is the cost of capital of the project? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Solutions

Expert Solution

Finding NPV:

Given cashflow at end of year1 is 6500. growth rate is 2.59% per year and cost of capital is 8.38%

Present value of these cashflows can be calulated using the formula: D1/(r-g), where D1 is cashflow at end of first period, r is cost of capital and g is growth rate.

On substituting, present value of cash flows is 6500/(8.38%-2.59%)= $112262.52

As Initial Investment is 46,300, NPV is -46300+112262.52= $65962.52

Finding X:

NPV for a time period of n can be calculated using the formula: C+C1/(1+r)+C2/(1+r)^2+....Cn/(1+r)^n; where C to Cn are cashflows and r is the required rate of return.

Given NPV is 69515 and cost of capital is 7.43%.

So, 69515= 24400+22790/1.0743-36790/1.0743^3+X/1.0743^4

53573.61= X/1.0743^4

X= 71359.74

Finding Cost of Capital:

Given Project is expected to produce annual cashflows of $2620 forever. Let r be the cost of capital of the project. Then Present value of the perpetual cashflows will be 2620/r.

Given Present Cost is 82800 and NPV is -57752.

So, -57752= -82800+2620/r

25048= 2620/r

r= 2620/25048

r= 0.1046

jeff jeffy answered 1 year ago

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