Q No. 1 Assume that you are given assignment to evaluate the capital budgeting projects of the company which is considering investing in two coal projects, “Thar Coal Project” and “Sahiwal Coal Project”. The initial cost of each project is Rs. 10000 Million. Company discounts all projects based on WACC. Further, all the projects are equally risky projects, and the company uses only debt and common equity for financing these projects. It can borrow unlimited amounts at after tax interest rate of rd 5% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. The dividend for next period is Rs 4.0, its expected that they will grow at the constant growth rate of 8%, and the company’s common stock sells for 40. The tax rate is 50%.
The cash flows of both the projects are given in table below:
Time Thar Coal Project Cashflows (amount in Rs. Millions) Sahiwal Coal Project Cashflows (amount in Rs. Millions)
0 - 10,000 - 10,000
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500
Carefully analyze the above table and answer the following questions in detail.
I. IV. Which project(s) should be accepted if they are independent? Explain
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