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1. A firm has the opportunity to invest in the project that is anticipated to pay an end-of-year annual return of $1.5 million for each of the next twenty years after taxes and expenses. The current cost of the project would be $7 million. Supposing a discount rate of 12%, as the required rate of return and (opportunity) cost of capital

(i.e., economic costs of capital):

(a) Compute the present value of the project to firm.

(b) Compute the net present value of project.

(c) Using the net present value principle finds out whether or not the firm must make the investment.

(d) Using the internal rate of return principle, find out whether or not the firm must make the investment.

(e) Using the equilibrium market value of the firm principle, find out whether or not the value of the firm would raise if the firm decided to undertake this investment project.

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M93671

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