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A firm has shortlisted the following two alternative projects for investment of $120 million. The...

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Finance

A firm has shortlisted the following two alternative projects for investment of $120 million. The investment amount is proposed to be mobilized from the following sources.

Debt: $78million @12% cost

Equity $42 million @ 14% cost

(a) Determine the appropriate cost to evaluate the alternative two projects if the tax rate applicable for the firm is 30%.

(b) Apply appropriate (at least two) techniques and find the best alternative project for investment purpose.

Year

Cash flow after tax, Project A

($ Million)

Cash flow after tax Project B

($ Million)

1

74

10

2

62

26

3

54

34

4

12

79

NB: the rates should be rounded off to the nearest whole number, like- if 10.45 take 10% or if 10.56, take 11% and so on.

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