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

Question

contestada

Respuesta :

Cricetus Cricetus · Answer 1 · 2021-07-24T02:47:05+02:00

Answer:

The correct answer is "32.076%".

Explanation:

Given:

Initial investment,

= $500,000

Cash inflows,

= $500,000

The floatation cost will be:

= [tex]500,000\times 6 \ percent[/tex]

= [tex]30,000[/tex] ($)

The total cost will be:

= [tex]Initial \ investment+Floatation \ cost[/tex]

= [tex]500000+30000[/tex]

= [tex]530000[/tex]

hence,

The rate of return will be:

= [tex]\frac{Inflows}{Cost} -1[/tex]

= [tex]\frac{700000}{530000} -1[/tex]

= [tex]\frac{700000-530000}{530000}[/tex]

= [tex]0.32076[/tex]

= [tex]32.076[/tex] (%)