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Telecom Italia is considering the investment in a capital project. The initial cost in year 0 is $149,000 to be depreciated straight line over 5 years to an expected salvage value of $15,000. The firm's tax rate is 35% and it has an 11% cost of capital (the firm's discount rate, or "hurdle" rate). For this project an additional investment in working capital of $12,000 is required and it will be recovered in full at the end of the project's life. The project will generate additional revenues of $64,000 in year 1 and these revenues will grow annually at a rate of 10%. The additional expenses of the project will be $15,000 in year 1 and will grow annually at 8%. What is the NPV and the IRR of the Project? Would you accept or reject this problem? Precisely state the reason why.

Basic Finance, Finance

  • Category:- Basic Finance
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