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    Cost of capital; Find NPV, IRR; which project to select

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    Problem 1

    A firm has a capital structure which consists of 30% debt and 70% equity. The cost of debt is 10% and the cost of equity is 15%. Find the cost of capital if the firm's tax rate is 34%.

    Problem 2

    A firm is evaluating a project with the following cash flows:

    Year0 = (100,000)

    Year1 = 26,000

    Year2 = 28,000

    Year3 = 28,000

    Year4 = 28,000

    Year5 = 28,000

    Year6 = 28,000

    Year7 = 28,000

    Year8 = 28,000

    Year9 = 28,000

    Year10 = 30,000

    The cost of capital is 12%.

    (a) Find NPV and IRR

    (b) Evaluate the project using each of your answers to (a)

    Problem 3

    A firm has a cost of capital of 5% and is considering two mutually exclusive investment projects with the following cash flows:

    Project A

    Year 0 = (70,500)

    Year 1 = 40,000

    Year 2 = 30,000

    Year 3 = 20,000

    Year 4 = 10,000

    Project B

    Year 0 = (70,500)

    Year 1 = 10,000

    Year 2 = 20,000

    Year 3 = 30,000

    Year 4 = 50,000

    (a) Find the IRR and NPV for each project

    (b) Which project should the firm select? Why?

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    Solution Summary

    The solution calculate cost of capital and find NPV, IRR and decide which project should a firm select?

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