Calculate for both projects A and B the:(a) Payback period; (b) Net Present Value (NPV); (c) Internal Rate of Return (IRR); (d) State which project you would recommend to Dreamon Corporation if ONE project can be selected (i.e. mutually exclusive). Give reason to support your decision. Question 1:You are the Finance Manager of Dreamon Corporation. Two capital budgeting projects are to beevaluated. The investment cost of each project is $15,000 and the cost of capital for eachproject is 10%. Further information for the projects is as follows:Project A9,7008,5005,500Project B5,2005,2005,200Year123

(A) Pay back period Year Project A Cumulative Cash Flow A Project B 1 9700 9700 5200 2 8500…

Answered: (c) Internal Rate of Return (IRR);

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter9: Capital Budgeting Techniques

Section: Chapter Questions

Problem 3PROB

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WACC AND OPTIMAL CAPITAL BUDGET Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Kate of Return 1 2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.30 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of 5.00 per year at 50.00 per share. Also, its common stock currently sells for 38.00 per share; the next expected dividend, D1, is 4.25, and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? b. What is Adamson's WACC? c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?
Would you rather have $7,500 today or at the end of 20 years after it has been invested at 15%? Explain your answer. The following are independent situations. For each capital budgeting project, indicate whether management should accept or reject the project and list a brief reason why.
Project B cost $5,000 and will generate after-tax net cash inflows of $500 in year one, $1,200 in year two, $2,000 in year three. $2,500 in year four, and $2,000 in year five. What is the NPV using 8% as the discount rate? For further instructions on net present value in Excel, see Appendix C.

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