Decacorn Capital LLP (Decacorn) is evaluating two greenfield solar energy projects with the following forecasted...
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Decacorn Capital LLP (Decacorn) is evaluating two greenfield solar energy projects with the following forecasted free cash flows:
The initial investment for Project Sumo and Project Steel is $200,000 and $170,000 respectively.
Decacorn would like to invest in only one project and uses a discount rate of 12% for solar energy projects.
Besides the solar energy projects, there is another investment opportunity to acquire a ride hailing business, Easy Ride Pte Ltd (Easy Ride). Currently, this firm does not have any debt and its cost of equity is estimated to be 18%. Post-acquisition, Decacorn intends to change Ride Easys debt-to-equity ratio to 0.25. The firm is envisaged to have a borrowing cost is 7% and corporate tax rate is 17%.
(a) Calculate the net present value (NPV) and internal rate of return (IRR). (b) Calculate the modified IRR for Project Steel. (c) Interpret your answer for part (a) and (b) and advise Decacorn which project it should undertake. (d) Calculate Easy Rides weighted average cost of capital (WACC) post-acquisition. Assume Modigliani and Miller (M&M) theory with tax holds true.
The initial investment for Project Sumo and Project Steel is $200,000 and $170,000 respectively.