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PROJECT FINANCIAL ANALYSIS Case Solution

Recommendations

Recommendation 1

Do you recommend implementing the project or not with 100% equity financing? Why or Why not?

Yes, the project should be implemented with 100% equity financing. This is because, all the three scenarios, which are best case appreciation and depreciation case.All. show a positive NPV and IRR, greater than the cost of capital for the project.

Recommendation 2

Would you recommend implementing the project with 50% debt financing?

Yes, the project should be implemented with 50% debt financing. This is because all the three scenarios, which are best case, appreciation and depreciation case all show a positive NPV for the project.

Recommendation 3

In what value range the discount rate need to be in order for you to recommend the project for implementation?

For the 100% equity scenario the discount rate should be between 0% and 15% approximately, for the project to be implemented.

For the 50% equity scenario the discount rate should be between 0% and 15% approximately, for the project to be implemented. If the WACC increases beyond 15% in both the above cases then the NPV for base case becomes negative, and thus the project should not be implemented.

Recommendation 4

How much room (if any) remains in each scenario (100% equity, 50% equity) for an idiosyncratic risk rate component?

As analyzed previously the maximum idiosyncratic risk rate under 100% equity can be only 10% or less. Then the room for idiosyncratic risk rate component under this scenario, would be 10% - 2.64% = 7.36%.

Similarly, the maximum idiosyncratic risk rate under 50% equity can be only 21% or less. Then the room for idiosyncratic risk rate component, under this scenario would be 21% - 8.16% = 12.84%.....................................................

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