Question

ABC Company is looking at investing in a project that has an npv of $5Million. ABC...

ABC Company is looking at investing in a project that has an npv of $5Million. ABC currently has $20Million in cash and the project needs a $20Million investment.

Is it better for shareholders to finance the project internally or to borrow $20Million to finance it?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

A company should not use all its funds in a single project as the popular adage goes, we should put all our eggs in a single basket. We should all diversify our investments. We should all look at the timing of cash flows coming from the project

Financing the whole project externally will put additional liability of interest payments on the firm

So it should be mix of Debt and Equity, So that we should able to make a proper capital structure for the project.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
ABC Inc. is looking at investing in a 3-year project that will create cash inflows of...
ABC Inc. is looking at investing in a 3-year project that will create cash inflows of $7,000 in the first year, $8,000 in the second year, and $9,000 in the third year. The cost of this project is $18,000, and the required return is 12%. Using the discounted payback period rule and a cutoff point of 2.5 years, should the company invest in this project? a. Yes, ABC should invest in this project because the discounted payback is approximately 2.6...
a company is considering investing in a project. The project will require a 10% rate return....
a company is considering investing in a project. The project will require a 10% rate return. The project will require $65,000 investment and provides the following returns: year 1:   $20,000 year 2: $20,000 year 3: $20,000 year 4: $25,000 I)Given that the company needs to make at least 10% return on its project what is the projects NPV for the return on its investment? A) $85,000 B) $20,000 C) Less than $2,000 but more than $1,000 D) less then $1,000...
ABC Inc. has a weighted average cost of capital (WACC) of 11.10%. It is considering investing...
ABC Inc. has a weighted average cost of capital (WACC) of 11.10%. It is considering investing in a new project with the same riskiness as the firm. The project will generate free cash flows in year 1 of $13,650,000. The free cash flows are expected to grow by 3.70% in perpetuity. The cost of the project is $172,000,000. This cost will be incurred at time 0, today. What is the net present value (NPV) of the project?
4) The Budwell & Son Oil Company is looking at two drilling proposals. One project lasts...
4) The Budwell & Son Oil Company is looking at two drilling proposals. One project lasts for three years, costs $20M to start, pays back quickly, and has an NPV of $15M. The other project also costs about $20M to start, but has an expected life of seven years, takes much longer to pay back, and has an NPV of $17M. Mr. Budwell, the company's founder, favors the shorter project because of the quick investment recovery. His son Billy, however,...
ABC Telecom has to choose between two mutually exclusive projects. If it chooses project A, ABC...
ABC Telecom has to choose between two mutually exclusive projects. If it chooses project A, ABC Telecom will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A...
Company ABC is considering a project with the following projected cash flows (in thousands): Year 0:...
Company ABC is considering a project with the following projected cash flows (in thousands): Year 0: -$60 Year 1: 10 Year 2: 20 Year 3: 30 Year 4: 40 Year 5: -$25 a. Assuming a 10% hurdle rate, the NPV for the project is b. Assuming a 10% hurdle rate, the IRR for company ABC project is: c. Based on the NPV calculation (10% hurdle rate) , should company ABC undertake the project d. Based on the IRR calculation (10%...
Consider a hypothetical economy that has NO tax. ABC Ltd. is considering investing in a 2-year...
Consider a hypothetical economy that has NO tax. ABC Ltd. is considering investing in a 2-year project which is expected to generate the following year-end cash flows: C1 = $110 million, C2 = $115 million. The yearly discount rate for the project is 10%. The initial cost of the project is $200 million. (f) Now suppose that of the $200m initial expenditure, $50m was used for the purchase of a machine that has an estimated economic life of four years....
Blackmores company is evaluating the feasibility of investing $80000 in a project with a 5 years...
Blackmores company is evaluating the feasibility of investing $80000 in a project with a 5 years life. The firm has estimated the cash inflows associated with the proposal as shown in the following table. The firm’s cost of capital is 8%. Company’s policy to recoup investment is four years or less. Average book value is $13550 Year cash inflows Net income 1 $25000 $3000 2 $25000 $2500 3 $25000 $2250 4 $25000 $2600 5 $25000 $3200 Require: a. Calculate the...
A company is considering investing in a project. The present value (PV) of future discounted expected...
A company is considering investing in a project. The present value (PV) of future discounted expected cash flows is either 7000 if the market goes up or 3000 if the market goes down next year. The probability the market will go up is 35%. The initial capital investment required at time 0 is 4000. Suppose the company has some flexibility in managing this project. If, however, the market should go up, the company could expand operations. With expansion the PV...
Consider a hypothetical economy that has NO tax. ABC Ltd. is considering investing in a 2-year...
Consider a hypothetical economy that has NO tax. ABC Ltd. is considering investing in a 2-year project which is expected to generate the following year-end cash flows: C1 = $110 million, C2 = $115 million. The yearly discount rate for the project is 10%. The initial cost of the project is $200 million. (a) Compute the profit and NPV of the project. (b) Based on the answer of part (a), should the project be accepted? Explain. (c) ABC’s cut-off period...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT