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Capital Budgeting Question for James Company

The James Company is considering investing in a new project. The project's forecasted net cash flows are the following:

0 -150,000
1 2,000
2 8,000
3 15,000
4 35,000
5 20,000
6 30,000
7 11,000
8 14,000
9 18,000
10 60,000

The project's cost of capital is 11%. Should the project be accepted or not? Why or why not?

Would you anticipate that a firm's Return on Common Equity would be smaller or larger than that same firm's Return on Total Assets?


Solution Preview

First, you need to find the net present value or NPV of the project. We can find NPV by finding the present value of each cash flow, including both inflows and outflows, discounted at the project's cost of capital.

We will consider the payment at Year 0 as cash outflow while the cash receipt will be regarded as cash ...

Solution Summary

This solution is comprised of a detailed explanation and calculation to answer as to whether the James Company should accept or reject the project.