Question

Cute Camel Woodcraft Company is considering a one-year project that requires an initial investment of $500,000; however, in raising this capital, Cute Camel will incur an additional flotation cost of 6%. At the end of the year, the project is expected to produce a cash inflow of $700,000. The rate of return that Cute Camel expects to earn on the project after its flotation costs are taken into account is

Answer 1

Answer:

The correct answer is "32.076%".

Explanation:

Given:

Initial investment,

= $500,000

Cash inflows,

= $500,000

The floatation cost will be:

= $500,000\times 6 \ percent$

= $30,000$ ($)

The total cost will be:

= $Initial \ investment+Floatation \ cost$

= $500000+30000$

= $530000$

hence,

The rate of return will be:

= $\frac{Inflows}{Cost} -1$

= $\frac{700000}{530000} -1$

= $\frac{700000-530000}{530000}$

= $0.32076$

= $32.076$ (%)