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You are evaluating the following project. All $ are in millions Initial cost of the project at t-0 is $70. Annual cash flows

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Answer #1
Before tax Cost of Debt 5%
Tax rate=40%= 0.4
After tax cost of debt =5*(1-0.4)= 3.00%
Cost of Equity =Risk Free Rate+Beta*(Market Risk Premium)
Cost of Equity =2.07%+2.1*6%= 14.67%
Weight of Debt in total   Capital 0.4
Weight of Equity in total   Capital 0.6
Weighted Average Cost of Capital
WACC=0.4*3+0.6*14.67= 10.00%
Present Value (PV) of Cash Flow:
(Cash Flow)/((1+i)^N)
i=Discount Rate=WACC=10% 0.1
N=Year of Cash Flow
Expected Annual Cash Flow 30 (0.3*45+0.4*30+0.3*15)
N Year 0 1 2 3
CF Expected Cash Flow($ million) ($70) $30 $30 $30 SUM
PV=CF/(1.1^N) Present Value of Cash Flow($ million) ($70) $27.27 $24.79 $22.54 $4.61
Expected NPV of the Project $4.61 Million
2 Variablity of cash flow makes Management hesitant to take up the project
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