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Problem:

A school is reviewing its research program. The program requires $30K to run next year in State A or $16K in State B (50% chance either state occurs). The Government will offer $5000 is State A occurs. Without the offer, the project's cash flows can be discounted at 15%, while the risk free rate is 8%.

Required:

Question 1: Calculate present value of the program cost without considering the government subsidy.

Question 2: Calculate present value of the program cost with the government subsidy.

Question 3: Calculate present value of government subsidy.

Question 4: If the current budget for the program is $18K, should the school go forward with the research program?

Question 5: What should the risk-adjusted discount rate be for the project with the Governmet subsidy?

Note: Provide support for rationale.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91169545

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