Your company estimates that the flotation cost to finance a project is 5 percent. When evaluating...
Your company estimates that the flotation cost to finance a project is 5 percent. When evaluating the project's NPV, you should:
add 5 percent to the firm's WACC to get the discount rate for the project.
increase the project's discount by multiplying the firm's WACC by 1.05.
increase the project's discount rate by dividing the firm's WACC by (1 - 0.05).
multiply the project's start-up cost by 1.05.
divide the project's start-up cost by 0.95.
Homework Answers
Answer:
Correct answer is:
divide the project's start-up cost by 0.95.
Explanation:
Flotation cost to finance a project is 5 percent
When evaluating the project's NPV we need initial investment.
Start up cost = Initial Investment - Flotation cost = Initial investment * (1 - 5%)
=> Initial Investment = Start up cost / (1 - 5%) = Start up cost / 0.95
Hence option E is correct and other options A, B, C and D are incorrect.
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