Ask Question
8 February, 03:13

The All-Mine Corporation is deciding whether to invest in a new one-year project. The project would have to be financed by equity, the cost is $2,000, and the return will be a guaranteed $2,500 in one year. The discount rate for both bonds and stock is 15 percent and the tax rate is zero. The predicted cash flows excluding this new project are $4,500 in a good economy, $3,000 in an average economy, and $1,000 in a poor economy. Each economic outcome is equally likely to occur and the promised debt repayment is $3,000. Should the company take the project

+2
Answers (1)
  1. 8 February, 05:53
    0
    A. NPV of the project

    NPV = - 2000 + 2500 / (1.15) = $173.91

    B. Value of the firm and its debt and equity components before and after the project addition.

    Determine expected cash flows before the project.

    ($3,000 + $3,000 + $1,000) / 3) / 1.15 = $2,333.33/1.15 = $2,028.99

    ($1,500 + $0 + $0) / 3) / 1.15 = $500/1.15=$434.78

    Determine value with project.

    ($3,000 + $3,000 + $3,000) / 3) / 1.15 = $3,000/1.15 = $2,608.70

    ($4,000 + $2,500 + $500) / 3) / 1.15 = $2,333.33/1.15=$2,028.99

    C. The company should not take the project because the NPV does not go to equity but to bond holders.
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “The All-Mine Corporation is deciding whether to invest in a new one-year project. The project would have to be financed by equity, the cost ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers