Question 11. Transcendental Advisors is advising one of their corporate clients on potential investment opportunities. The...

Question 11. Transcendental Advisors is advising one of their corporate clients on potential investment opportunities. The advisors are presented with two business strategies (a and b below). The company expects the profit to be $2,000,000 a year with no growth. The company also operates tax-exempt and is subject to 8.6% p.a. cost of capital compounded annually. The company long-term borrowing rate is 5.9% p.a. compounded annually.

a) Spend $5,000,000 to expand existing operations, boosting current expected annual profit from $2,000,000 to $3,000,000.

b) Spend $10,000,000 on lobbying and sign an exclusive contract with the government, who guarantees to purchase all of the company’s products for $2,500,000 a year but prohibits the company from selling anything to the existing customer base.

Which investment opportunity is better? Show your work. (assume the client company operates perpetually)

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please like the answer

jeff jeffy answered 1 year ago

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