Capital budgeting analysis on a project with estimated cost

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Reference no: EM13811701

1) Suppose you are running a capital budgeting analysis on a project with an estimated cost of $2 million. The project is considered similar to the existing lines of businesses for the company. Given the cash situation, the company will fund the project completely with a new debt of $2 million. This new debt will be issued at 6% interest for 10 years. The company has an estimated 8% WACC. When conducting the capital analysis on this project, what should be your discount rate (cost of capital) for the project?

2) Suppose you are managing a two-story rental building in uptown Columbus, GA. You have a tenant in the first story with $3,000 monthly rent. Current the monthly maintenance of the building costs $1,200/month, and you are paying $1,600 monthly mortgage payment including insurance and taxes. You are considering a lease on the second floor, but with another tenant you expect the maintenance costs to increase to $1,500/month, in addition to a $5,000 initial investments to fix up the second floor. Given this information, what are the relevant cash flows that you must factor in to come up with a minimum rent that you must charge. You do not need to compute the rent amount, but must identify the relevant cash flows and the rationale.

3) In capital budgeting, the IRR implicitly assumes reinvestments of interim cash flows at the IRR itself. First, discuss why this assumption is problematic. Then, explain how MIRR address this issue by presenting your own unique example with proper calculations. The example project should be a 4 year project. For example, a 4-year project with following cash flows, -500, 200, 200, 200, 100, at T=0 to 4, respectively.

Reference no: EM13811701

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