Question #1
Consider the following potential investment, which has the same risk as the firm's other projects:
|
Time
|
Cash Flow
|
|
0
|
-$192,000
|
|
1
|
$68,000
|
|
2
|
$70,000
|
|
3
|
$72,000
|
|
4
|
$74,000
|
The firm's current weighted-average cost of capital is 15%.
a) How much value will this investment create for the firm?
b) At what discount rate will this project break even?
c) Should the firm do this investment? Be sure to justify your recommendation.
d) How would your analysis change if this potential investment was more risky than the firm's other projects? Be specific.