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never [62]
3 years ago
5

Two mutually exclusive investment opportunities require an initial investment of $7 million. Investment A pays $1.5 million per

year in perpetuity, while investment B pays $1.2 million in the first year, with cash flows increasing by 3% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent
Business
1 answer:
Nataly_w [17]3 years ago
4 0

Answer:The cost of capital that will make both investments equal is 17.045%

Explanation:

Investment A

$1.5 million will be received in perpetuity we can there use perpetuity formula to Value investment A.

Value of Investment A = 1500 000/r

Investment B

$1.2 Million will be received in Investment B with a growth rate of 3% will then use Gordon's growth rate model to value investment B.

Value of investment B = (1200 000 x (1+0.03))/(r - 0.03)

Value of investment B = 1236000/(r - 0.03)

1500 000/r = 1236000/(r - 0.03)

1236000(r) = 1500000(r - 0.03)

(r - 0.03) = 1236000( r)/1500000

r - 0.03 = 0.824r

r - 0.824r = 0.03 = 0.176r = 0.03

r = 0.03/0.176 = 0.170454545

R = 17.045%

The cost of capital that will make both investments to be equal is 17.045%

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3 years ago
What is the price paid for the use of borrowed money referred to as?
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Interest
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2 years ago
On January​ 1, 2018,​ Jordan, Inc. acquired a machine for $ 1,000,000. The estimated useful life of the asset is five years. Res
klemol [59]

Answer:

Annual depreciation=$188,000

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6 0
2 years ago
Compliance is the responsibility of the Compliance Officer, Compliance Committee, and Upper Management only.
Anna71 [15]

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<h3>What is Compliance?</h3>

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It is the duty of all the individuals to comply with the policies and ensure that the procedures are performed as per the standard operating guidelines. The compliance is not only the duty for the compliance individuals.

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faltersainse [42]

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Production Cycle​ and Collection Cycle are both related to assets and thus are positive in the equation for the CCC. The payment cycle is a liability and therefore must be taken as negative in the equation.

The alternative C. Cash Conversion Cycle​ = Production Cycle​ + Collection Cycle​ + Payment Cycle is NOT true

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