A small enterprise plans a project costing ₦5,000,000. It can finance the project with 40\% equity (cost = 12\%), 30\% bank loan at 9\% interest (tax‑deductible, corporate tax = 30\%), and 30\% retained earnings (cost = 8\%).

a) Calculate the weighted average cost of capital (WACC).

b) Assuming the project generates equal cash inflows at the end of each year for 5 years and using the WACC as discount rate, what is the minimum annual cash inflow required for the project's NPV to be zero? (Ignore depreciation and salvage value.)

Question

A small enterprise plans a project costing ₦5,000,000. It can finance the project with 40\% equity (cost = 12\%), 30\% bank loan at 9\% interest (tax‑deductible, corporate tax = 30\%), and 30\% retained earnings (cost = 8\%).

a) Calculate the weighted average cost of capital (WACC).

b) Assuming the project generates equal cash inflows at the end of each year for 5 years and using the WACC as discount rate, what is the minimum annual cash inflow required for the project's NPV to be zero? (Ignore depreciation and salvage value.)

Accepted Answer

WACC = 9.09\%; minimum annual cash inflow ≈ ₦1,289,000

Neco 2024 Commerce Question 20

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