Complete the "Opener-in-Review" section on page 419 of your text:
The following is some additional information regarding the Seafield Resources' mining opportunity mentioned in the chapter opener.
Seafield's cost of capital: 10%
Initial Cost: $83.6 million
Project life: 12 years
Cash flow in years 1-2: $18.8 million
- The chapter opener reported that the project had an NPV of $66 million and an internal rate of return of 20%. From those two facts alone, what can you conclude about Seafield's cost of capital? (Hint: Is it more than or less than 20%?)
- Given the information above about the project's initial cost and subsequent cash flows as well as the information from part a, can you estimate Seagate's cost of capital?