Question

Assume that as a local government financial analyst you are asked to project the feasibility of a loan to a proposed public service venture for its start-up funding. The venture’s principals estimate that, at the end of 5 years, they will be able to pay back up to $800,000 from revenues accruing to the venture’s activities. Assuming that your organization’s current “average cost of capital” is 4.8% (the “discount rate”). Assuming monthly compounding, what is the maximum amount your government can commit to the venture for its start-up?

Expert Solution

Want to see the full answer?

Check out a sample Q&A here
Blurred answer
Students who’ve seen this question also like:
EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
Not helpful? See similar books
EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Capital Budgeting: Decision Criteria And Real Option. 23P
marketing sidebar icon
Want to see this answer and more?
Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*
*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.

Related Finance Q&A

Find answers to questions asked by students like you.

Q: 1. Assume that as a local government financial analyst you are asked to project the feasibility of a…

A: Click to see the answer

Q: Use Excel to solve the following problem. Assume that as a local government financial analyst you…

A: Click to see the answer

Q: Halifax Technologies primarily relies on 100% equity financing to fund projects. A good opportunity…

A: Click to see the answer

Q: JENNY Company is considering borrowing P800,000 from the bank for less than a year as additional…

A: Simple interest is a quick and easy method of calculating interest charged on a loan. This interest…

Q: An investor injects $ 40,000 in a new project. After investing an additional funds of $2000 in the…

A: For Profitability Index calculation we need to first calculate the present value of cash inflows and…

Q: A contractor would like to invest in a real- estate development project and expecting to get $20,000…

A: Compounding interest rate is the rate applied on the initial amount invested or borrowed and the…

Q: Before evaluating the economic merits of a proposed investment, the XYZ Corporation insists that its…

A: Cash outflow is the initial investment made by any firm in order to start any project. Cash inflows…

Q: Before evaluating the economic merits of a proposed investment, the XYZ Corporation insists that its…

A: Click to see the answer

Q: A group of private investors borrowed $30 million to build 300 new luxury apartments near a large…

A: Borrowed amount = $30000000 Annual interest = 6% Loan is to be repaid in equal annual…

Q: You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you…

A: Payback period is the number of years it would take for the company to recovers its cost. It is…

Q: You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you…

A: Payback period is the number of years it would take for the company to recovers its cost. It is…

Q: Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of…

A: Internal rate of return = Internal rate of return is a discount rate at the the present value of all…

Q: Kartman Corporation is evaluating four different real estate investments. Management plans to buy…

A: Discount Rate = 11% Capital Budget = 600,000 Since capital budget is less than cost of Real Property…

Q: A local municipality is considering investing $270,000 to upgrade a park. Based on similar…

A: Interest rate =6% Present value FACTOR =1-(1+r)-n/r Present value FACTOR =1-(1.06)-7/0.06 Present…

Q: A local retail franchise must buy a new piece of equipment in 6 years that will cost $89,000. The…

A: Payment per period can be calculated using PMT function in excel.   PMT(rate, nper, pv, [fv],…

Q: Kartman Corporation is evaluating four different real estate investments. Management plans to buy…

A: Annual discount rate = 11% Profitability index is present value of benefits to initial cost.

Q: KUST is evaluating a new project for hangu campus. The financial manager has determined that the…

A: The project has a negative net present value (NPV) of $1,428

Q: KUST is evaluating a new project for hangu campus. The financial manager has determined that the…

A: Payback pereiod is the time required for the project to cover its intial investment. It can be…

Q: L& T Corporation is considering an investment proposal in which a working capital investment of…

A: Present value (PV) refers to the determination of the value of money at present that is expected to…

Q: Your supervisor has tasked you with evaluating several loans related to a new expansion project.…

A: Solution: Annual payment on Loan = $450,000 / Cumulative PV factor at 8% for 5 periods = $450,000 /…

Q: A person was offered to invest $25,000 in a Benggs project in five years, the project's expected…

A: Here in this question, we are required to calculate the annual return that project earn. Formula =…

Q: Supervenes is a freight delivery company, it uses the internal rate of return (IRR) to select…

A: Internal rate of return is one of the capital budgeting techniques. It refers to the discount rate…

Q: Shell Camping Gear, , is considering two mutually exclusive projects. Each requires an initial…

A: Payback period is the time period required to cover initial investment of the project. It is a…

Q: Kartman Corporation is evaluating four different real estate investments. Management plans to buy…

A: The profitability index will tell investment worth to the entity. The higher the PI index, Higher is…

Q: A person was offered to invest $25,000 in a Benggs project in five years, the project's expected…

A: The annual rate of return is the return which the investor can expect to attain against the…

Q: A person was offered to invest $25,000 in a Benggs project in five years, the project's expected…

A: Net Present Value = Present Value of Cash Inflows - Initial Investment

Q: Below is a list of aspects of various capital expenditure proposals that the capital budgeting team…

A: After Tax Cash Flow: It is measure of financial performance which is calculated by adding back…

Q: You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you…

A: Payback period is the number of years it would take for the company to recovers its cost. It is…

Q: A person was offered to invest $25,000 in a Benggs project in five years, the project's expected…

A: Computation of annual net cash inflow from project. Revenue…

Q: Recent sales of some real estate and record profits make it possible for a manufacturer to set aside…

A: Present value of fund (PV) = $ 1,100,000 Interest rate = 6.3% Semi annual rate (r) = 6.3%/2 = 3.15%…

Q: Purple Cloud Inc. has $500,000 to invest. The company is trying to decide between two alternative…

A: The decision about the choice of alternative will be based on the calculation of present value of…

Q: The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M.…

A: Net present value is the net worth of a project in current terms. It is a major decision-making tool…

Q: a gives them a cost estimate of $14 million, including her fees. What is the annual debt service…

A: In this we have to determine the interest cost of each year.

Q: A person was offered to invest $25,000 in a Benggs project in five years, the project's expected…

A: Internal rate of return is rate of return at which present value of cash flow is equal to the…

Q: A person was offered to invest $25,000 in a Benggs project in five years, the project's expected…

A: Here in this question we are required to calculate the annual return achieved. Annual return is a…

Q: A person was offered to invest $25,000 in a Benggs project in five years, the project's expected…

A: Net Present Value = Present Value of Cash Inflow - Initial Investment

Q: BRCC is evaluating two options for funding its working capital during the next year. Option one is…

A: a) Option 1: Money to borrow = Fund need / (1 - Rate*180/365) / (1 - Compensating balance) + $5000…

Q: A firm has a capital budget of $30,000 and is considering three possible independent projects.…

A: Capital budget= $30,000 Present outlay of Project A= $12,000  Yields of Project A= $4, 281 per annum…

Q: A firm has a capital budget of $30,000 and is considering three possible independent projects.…

A: Capital budget= $30,000 Present outlay of Project A= $12,000  Yields of Project A= $4, 281 per annum…

Q: XYZ, Co. is considering the purchase of a new building that will allow them to expand their market.…

A: In taking of Capital Budgeting decision we consider the free cash flow from project. meaning of free…

Q: Halls Construction is analyzing its capital expenditure proposals for the purchase of equipment in…

A: Halls Company would compute the payback period for projects A, B, and C. The project(s) having the…

Q: The municipality of Smallville has arranged to borrow $30 million in order to implement several…

A: According to the question, we need to calculate the number of years it will take to pay off the…

Q: The Danville Company is considering a $50 million expansion (capital expenditure) program next year.…

A: Solution:- Calculation of approximately how much additional financing will be needed if the…

Q: Micheal is considering a capital investment that costs $540,000 and will provide net cash inflows…

A: Answer  Calaculation of Net Present Value(NPV): At first we need to calaculate the present value of…

Q: Ipswich Corporation is considering an investment opportunity with the expected net cash inflows of…

A: Determination of present value is a technique used by the entity so as to make the decisions…

Q: A master of accountancy degree at Central University costs $12,000 for an additional fifth year of…

A: Answer 1 The net present value of cash flows from an undergraduate degree is computed as: Discounted…

Q: Green Caterpillar Garden Supplies Inc. is considering a one-year project that requires an initial…

A: Amount required to be raised = Amount required/(1-flotation cost)

Q: A structural engineering consulting company is examining its cash flow requirements for the next 6…

A: Spending after 2 years = $ 21,000 Spending after 3 years = $ 24,000 Spending after 5 years = $…

Q: borrowing money from Superior National Bank to finance the construction of a new plant in Wisconsin.…

A: The given problem can be solved using EFFECT function in excel. EFFECT function computes effective…

Q: Company is considering investing in a project. After consulting with their analysts, they find that…

A: Payback period is one of the capital budgeting traditional techniques which is used to analyze the…

Knowledge Booster
Finance
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are displayed in image. Each investment has a 6-year expected useful life and no salvage value. A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? C. If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
    Use Excel to solve the following problem. Assume that as a local government financial analyst you are asked to project the feasibility of a loan to a proposed public service venture for its start-up funding. The venture’s principals estimate that, at the end of 5 years, they will be able to pay back up to $800,000 from revenues accruing to the venture’s activities. Assuming that your organization’s current “average cost of capital” is 4.8% (the “discount rate”). Assuming monthly compounding, what is the maximum amount your government can commit to the venture for its start-up? (I have worked this problem out on my own, I just want to be sure I used the correct formulas.)
    Halifax Technologies primarily relies on 100% equity financing to fund projects. A good opportunity is available that will require $250,000 in capital. The Halifax owner can supply the money from personal investments that currently earn an average of 8.5% per year. The annual net cash flow from the project is estimated at $30,000 for the next 15 years. Alternatively, 60% of the required amount can be borrowed for 15 years at 9% per year. Using a before- tax analysis and setting the MARR equal to the WACC, determine which plan, if either, is better.
  • Dawn is preparing a home office to perform subcontract projects for midsized architect firms. She plans to use $13,000 of her own funds, which currently generate a return of 4% per year. The remainder of financing will be provided by a $9,000 bank loan carrying a 9% per year interest rate. She hopes to realize a return of 3% above the average cost of capital to establish her office, and she realizes that the factors of inflation and risk should also be considered. Her decision is to add another 1.5% per year to compensate for these elements. What is the MARR she should use when evaluating projects? the Marr she should use is __%
    You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze six proposed capital investments. Each project has a cost of $1,000, and the required rate of return for each is 12%, determine for each project (a) the internal rate of return. Assume under MACRS the asset falls in the three-year property class and that the corporate tax rate is 25 percent. You are limited to a maximum expenditure of $3000 only for this capital budgeting period. Which projects you will accept and why? Justify your suggestions
    Supervenes is a freight delivery company, it uses the internal rate of return (IRR) to select projects. The treasurer was presented with an opportunity to invest in project Sigma which requires an initial investment of $20,000 and generates cash inflows of $8,000 per year for 5 years. The cost of capital is 10%. Required: Calculate the IRR for the Sigma project and advice if the project should be taken. The full calculation must be shown for marks.
  • An investor injects $ 40,000 in a new project. After investing an additional funds of $2000 in the first year, he receives a net benefit of $15000. In the second year the investment is $3000 and the net benefit amounts to $20,000. Following third and fourth year investments and benefits were 4,000 for a benefit of 19000 and 1,000 for a benefit of 16,000. Given that the discount rate is 12%, determine the profitability index.
    Plug N’ Play Inc. is considering financing a project as part of its regular capital budgeting process. The company wants to reevaluate its cost of capital for the upcoming projects. The company uses all the three components of capital for raising its fund; debt, preferred and common equity maintaining a target capital structure of 30%, 20%, and 50%. The company’s corporate tax is40%. Based on the above information, answer the following questions:a. If the company would be able to issue new 20-year debt with a cost of 10%, what is the after-tax component cost of the new debt?b. It can issue perpetual preferred stock at a price of $40 a share. The issue is expected to pay a constant annual dividend of $5.00 a share. The floatation cost on the issue is estimated to be 5 percent. What is the component cost of the new preferred stock?
    The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash inflow of $124,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5.7 percent per year forever. The project requires an initial investment of $1,470,000.     a. If the company requires a return of 13 percent on such undertakings, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. The company is somewhat unsure about the assumption of a growth rate of 5.7 percent in its cash flows. At what constant growth rate would the company just break even if it still required a return of 13 percent on its investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
    Recommended textbooks for you
  • EBK CONTEMPORARY FINANCIAL MANAGEMENT
    Finance
    ISBN:9781337514835
    Author:MOYER
    Publisher:CENGAGE LEARNING - CONSIGNMENT
    Corporate Fin Focused Approach
    Finance
    ISBN:9781285660516
    Author:EHRHARDT
    Publisher:Cengage
    Cornerstones of Cost Management (Cornerstones Ser...
    Accounting
    ISBN:9781305970663
    Author:Don R. Hansen, Maryanne M. Mowen
    Publisher:Cengage Learning
  • Principles of Accounting Volume 2
    Accounting
    ISBN:9781947172609
    Author:OpenStax
    Publisher:OpenStax College
    Essentials of Business Analytics (MindTap Course ...
    Statistics
    ISBN:9781305627734
    Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
    Publisher:Cengage Learning
    Financial Management: Theory & Practice
    Finance
    ISBN:9781337909730
    Author:Brigham
    Publisher:Cengage
  • EBK CONTEMPORARY FINANCIAL MANAGEMENT
    Finance
    ISBN:9781337514835
    Author:MOYER
    Publisher:CENGAGE LEARNING - CONSIGNMENT
    Corporate Fin Focused Approach
    Finance
    ISBN:9781285660516
    Author:EHRHARDT
    Publisher:Cengage
    Cornerstones of Cost Management (Cornerstones Ser...
    Accounting
    ISBN:9781305970663
    Author:Don R. Hansen, Maryanne M. Mowen
    Publisher:Cengage Learning
    Principles of Accounting Volume 2
    Accounting
    ISBN:9781947172609
    Author:OpenStax
    Publisher:OpenStax College
    Essentials of Business Analytics (MindTap Course ...
    Statistics
    ISBN:9781305627734
    Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
    Publisher:Cengage Learning
    Financial Management: Theory & Practice
    Finance
    ISBN:9781337909730
    Author:Brigham
    Publisher:Cengage