Answered: Montreal Comedy Clubs Limited – It has…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 8TP: Fenton, Inc., has established a new strategic plan that calls for new capital investment. The...

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Montreal Comedy Clubs Limited – It has $500,000 investable fun to invest in either “BIG” or “Singa”. The firm’s cost of capital is 12% As the table below indicates, MCC should consider making the Singa investment because this will allow MCC to have more money after eighteen months. However, your manager directs you to calculate the present value of cash inflow of BIG and Singa respectively and compare on present value basis. The cost of capital is 12% per annum. Explain why on present value terms BIG may or may not be higher than Singa. BIG Investment Singa Investment Semi-annual Periods Semi-annual Dividend Income 7% Future Value Factor @ 12%/2 =6% Future Value Quarterly Periods Quarterly Dividend Future Value Factor @ 12%/4 = 3% Future Value 1 $35,000.00 1.1236 $39,326.00 1 $12,500.00 1.1593 $14,491.25 2 35,000.00 1.0600 37,100.00 2 12,500.00 1.1255 14,068.75 3 35,000.00 1.0000 35,000.00 3 12,500.00 1.0927 13,658.75 - 4 12,500.00 1.0609 13,261.25 - 5 12,500.00 1.0300 12,875.00 6 12,500.00 1.0000 12,500.00 Principal 500,000.00 1.0000 500,000.00 531,250.00 1.0000 531,250.00 Future value $611,426.00 $612,105.00

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