Question

Threes Company is evaluating a new project. Threes has to invest $500,000 into the project now, and, then, the firm expects to receive (after-taxes) cash inflows from this project as below:

Year 1	Year 2	Year 3	Year 4	Year 5
$125,000	$186,000	$225,000	$190,000	$140,000

Threes uses the CAPM in estimating cost of equity capital. Threes Co’s’ estimates on the CAPM variables are as follows: the project’s beta = 1.50; the risk-free rate = 4%; and the return on the market portfolio = 12% during the project’s life, respectively. Threes Co’s income tax rate is 40%. Threes Co. has no long-term bonds outstanding (i.e., all equity firm)

1. What is the cost of equity of Threes Company?
   1.   4%
   2.   8%
   3. 12%
   4. 16%
   5. 20%

1. A. What is the internal rate of return (IRR) of the project?
   1.   4.0%
   2. 12.0%
   3. 16.0%
   4. 21.0%
   5. 25.0%

1. What is the payback (PB) period of the project?
   1. Longer than 5 years.
   2. Close to 5 years.
   3. Close to 4 years.
   4. Close to 3 years.
   5. Less than 3 years.   1.C What is the NPV of the new project?
      1.   $11,430
      2.   $61,700
      3. $120,200
      4. $188,700
      5. $366,000

Answer 1