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QUESTION 2 Cash Flow Analysis (10 marks) You are considering a 5-year investment project which is expected to cost $1,000,000. In each year, you have decided that there are 3 possible states of the economy: good, average, and poor. In cach individual year there is a 35% chance of the economy being good and a 15% chance of it being poor. You forecast the following net cash flows for the project: Year 2 Economy Year Year 4 Years Year 1 300,000 Good 250,000 350.000 400.000 350,000 275,000 225,000 250.000 125.000 175.000 275.000 Average Poor 200,000 150,000 225.000 250.00 (a) What is the expected net cash flow each year? marks) Hier Do some research on how to calculate expected cash low gives probabilities in each scenario You have arranged the following sources of funding (1) $200,000 from a 5-year fixed interest loan whow anual loan payments are $48,126,91 (ii) $250,000 from a 5-year zero-coupon bond will face value of $350,000 (iii) $300,000 from an ordinary share issue where a dividend of $18,000 will be paid in one year and it is expected to grow at 3% per annum. (iv) $250,000 from a 5-year coupon-paying bond issue whose coupon rate is 7% and ice value is $250.000 (b) what is the discount rate given above sources of financing? (5 marks) Hin The discount rate should be the weighted average cost of capital (e) What is the NPV of this investment project and should you invest in this project? (2 marks)

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