Shiloh Ltd is buying a piece of equipment for GH¢100,000. The company intends to finance the purchase using debt and equity. A loan (debt) of GH¢30,000 is to be sourced from GCB at an interest rate of 16% per annum. The remaining GH¢70,000 will be financed using equity. The firm is listed on the GSE with an equity beta of 2.5. The risk free rate of interest is 10% and the market risk premium is 10%%. The marginal tax rate of the firm is 25%. The equipment is expected to generate the following cash flows: Year Cash Flows (GH¢) 1 25,000 2 39,000 3 42,000 4 35,000 5 25,000 6 30,000 Required: Advise whether the company should buy the equipment or not using the NPV and profitability index Why would you prefer the NPV method to other methods of project evaluation?

Shiloh Ltd is buying a piece of equipment for GH¢100,000. The company intends to finance the purchase using debt and equity. A loan (debt) of GH¢30,000 is to be sourced from GCB at an interest rate of 16% per annum. The remaining GH¢70,000 will be financed using equity. The firm is listed on the GSE with an equity beta of 2.5. The risk free rate of interest is 10% and the market risk premium is 10%%. The marginal tax rate of the firm is 25%. The equipment is expected to generate the following cash flows: Year Cash Flows (GH¢) 1 25,000 2 39,000 3 42,000 4 35,000 5 25,000 6 30,000 Required: Advise whether the company should buy the equipment or not using the NPV and profitability index Why would you prefer the NPV method to other methods of project evaluation?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 8P

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