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

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?

Solution Summary

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

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