Salwa is considering three competing Food and Beverage projects for investment. The projected cash flows of the three considered projects over a 6-year period are as listed in the table below. Regardless of the chosen project, she intends on financing it partially through debt and partially through equity. The debt financing share is 75% and has a cost of 12% / year. The equity share is retrieved from a bank account paying 4% / year interest. On top of its WACC, Salwa requires at least 2 percentage points of profit. Year 1 2 3 4 5 Project 1 ($) Project 2 ($) -5,000 1,500 2,500 3,500 1,000 1,000 900 -10,000 3,400 3,400 3,400 3,400 3,400 3,400 Project 3 ($) -6,500 3,800 3,200 2,300 1,600 700 200

Salwa is considering three competing Food and Beverage projects for investment. The projected cash flows of the three considered projects over a 6-year period are as listed in the table below. Regardless of the chosen project, she intends on financing it partially through debt and partially through equity. The debt financing share is 75% and has a cost of 12% / year. The equity share is retrieved from a bank account paying 4% / year interest. On top of its WACC, Salwa requires at least 2 percentage points of profit. Year 1 2 3 4 5 Project 1 ($) Project 2 ($) -5,000 1,500 2,500 3,500 1,000 1,000 900 -10,000 3,400 3,400 3,400 3,400 3,400 3,400 Project 3 ($) -6,500 3,800 3,200 2,300 1,600 700 200

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 7E

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