1) Company x intends to finance a project. The source of capital will be a bank loan. The terms of the loan are an interest rate of 6%, a maturity of five years, semiannual interest payments, a loan amount of $500,000. No principal is repaid by the borrower until the end of year five when the loan matures and the $500,000 must be repaid in full (five years from the time the loan is made). The company rule is that only projects that have cash flows with a present value greater than the present value of the loan amount should be accepted. The interest rate the company uses to discount the project cash flows also called the required rate of return is 10%. This project should be accepted by managers if cash flows in each period (see cash flows below for base case) can be boosted by 10%.
Project Project Cash Flows
time 1= $125,000
time 2 = $]125,000
time3 = $125,000
time 4 = $125,000
time 5 = $125,000
True
False