Dale Corporation has two independent projects in which it can invest. The initial cost of the project S is $26,000, and the initial cost of the project F is $63,000. The expected income streams from these projects are found in the table below. The risks of both projects are similar to the risks of current company projects. The current risk-free rate is 0.57% and the market risk premium (return to the market minus the risk-free rate) is expected to be 6.00% per year. The company's beta is 1.55. The company will be raising all cash for these projects through debt. The company expects to pay 1.03% for any debt used in the project(s). The target capital structure for the company is 40% equity and 60% debt. The marginal tax rate is 40%.
|
Expected Cash Flows
by Project
|
|
Project S
|
Project F
|
|
Year 1
|
7,500
|
14,382
|
|
Year 2
|
6,614
|
5,526
|
|
Year 3
|
3,110
|
9,072
|
|
Year 4
|
5,498
|
17,918
|
|
Year 5
|
7,394
|
10,140
|
|
Year 6
|
1,528
|
8,320
|
|
Year 7
|
4,704
|
17,696
|
|
Year 8
|
5,220
|
14,988
|
|
|
|
|
a) What is the firm's weighted average cost of capital?
b) Which rate should the company use to discount capital projects (such as NPV) in this case?
c) What is the net present value (NPV) for each project?
d) What is the payback period for each project?
e) What is the internal rate of return (IRR) for each project?
f) Which project(s) should the company adopt to maximize the value of the firm? Briefly describe why you selected that (those) project(s)?