Question

Cold Goose Metal Works Inc. is considering a one-year project that requires an initial investment of $500,000; however, in raising this capital, Cold Goose will incur an additional flotation cost of 4%. At the end of the year, the project is expected to produce a cash inflow of $600,000. The rate of return that Cold Goose expects to earn on the project after its flotation costs are taken into account is

Answer 1

Answer:

The rate of return expected on this project by Cold Goose Metal Works Inc. is 15.20%

Explanation:

Since flotation cost is 4% that implies that $500,000 is actually 96% (100%-4%) of the cash proceeds from the capital funding,hence funds raised is computed thus:

funds raised=$500,000/0.96=$520,833.33  

Annual return on investment=cash inflow-initial cash outflow

cash inflow is $600,000

cash outflow  is $520,833.33  

annual return on investment=$600,000-$520,833.33=$79166.67

rate of return on project=annual return on investment/initial investment

                                        =$79,166.67 /$520,833.33*100=15.20%

The rate of return that Cold Goose Metal Works Inc is 15.20%