that you are a new analyst hired to evaluate the capital budgeting projects of the company which is considering investing in two CPEC projects, “Expansion Zone North” and “Expansion Zone East”. The initial cost of each project is Rs. 10,000. Company discount all projects based on WACC. Further, all the projects are equally risky projects and the company uses only debt and common equity for financing these projects. It can borrow unlimited amounts at an interest rate of rd 10% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. The dividend for next period is $2.0, its expected that they will grow at the constant growth rate of 8%, and the company’s common stock sells for $20. The tax rate is 50%.
The cash flows of both the projects are given in table below:
Time
Expansion Zone North
Cashflows (amount in Rs.)
Expansion Zone East
0
- 10,000
1
6,500
3,500
2
3,000
3
4
1,000
Carefully analyze the above table and answer the following questions in detail.
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