A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

Final Examination FINC 5880 Week 9 NAME_________________

Question 1. (15 points) Otel Corporation entered into an agreement with its investment banker to sell 15 million shares of the company's stock with Otel netting $270 million dollars from the offering. The out-of-pocket expenses incurred by the investment banker were $5,000,000.

a. What profit or loss would the investment banker incur if the issue sold to the public at an average price of $25 per share?

b. What profit or loss would the investment banker incur if the issue were sold to the public at an average price of $15 per share?

c. Is this an example of a negotiated deal or best efforts? Why? Who bears the greater risk, the investment banker or the company? Why?

Page 1 of 46

4/15/2012

A 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80

d. If the investment banker agrees to handle the issue on a best efforts basis, earning 7.5 percent of the proceeds, calculate the investment banker's profit or loss if all 15 million shares are sold at an average price of $15. How much will the company receive?

e. Who bears the greater risk in a best efforts deal, the investment banker or the company? Why?

Page 2 of 46

4/15/2012

Examination 1 INC 5880 2 Week 9 3

4

5 eement with its investment banker to sell 15 million 6 dollars from the offering. 7 8 er were $5,000,000. 9 he issue sold to the public at an average price of $25 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

28 29 he issue were sold to the public at an average price 30 31 32 33 34 35 36 37 hy? Who bears the greater risk, the investment 38 39 40 41 42 43 44 45 Page 3 of 46 4/15/2012

46 47 48 best efforts basis, earning 7.5 percent of the 49 all 15 million shares are sold at an average price of 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 stment banker or the company? Why? 70 71 72 73 74 75 76 77 78 79 80

Page 4 of 46

4/15/2012

Number of shares to be sold 15,000,000 Amount received by Otel from the offering $270,000,000.00 Out of pocket expense incurred by the investment banker $5,000,000.00 (a) Selling price of the issue to the bublic Total amount received by the investment banker $25.00 per share $375,000,000.00

Profit incurred by investment banker (b) Selling price of the issue to the bublic Total amount received by the investment banker

$100,000,000.00 $15.00 $225,000,000.00

Loss incurred by investment banker (c)

-$50,000,000.00

Its a negotiated deal because the investment banker buys the new security from the company at a purchase price offering these securities to the public at an offering price. Where in best efforts the investment banker doesn't bu securuties from the company and due to this the risk remains with the company. He the greater risk is born bu the banker.

(d) Average price of the share Investment banker earning Amount in proceeds Investment banker earning Investment banker cost Investment banker profit (e) $15.00 7.50% of the proceeds $225,000,000.00 $16,875,000.00 $5,000,000.00 $11,875,000.00

Here the greater risk is born by the company because the investment banker will earn a percentage of amount co issue irrespective of it being undersubscribed or over subscribed but the company gets affected by this as it has to investment banker even if its shares are undersubscribed

ompany at a purchase price and then estment banker doesn't buy the new e greater risk is born bu the investment

a percentage of amount coming out of the affected by this as it has to pay the

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47

Final Examination FINC 5880 Week 9

Question 2. (15 points) Differentiate between each of the following and provide a specific example to illustrate each ans a. A golden parachute and a poison pill.

b. A friendly merger and a hostile merger.

c. A vertical merger and a horizontal merger.

d. An acquiring company and a target company

e. Purchase accounting and pooling of interest accounting

Page 7 of 46

4/15/2012

A 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66

Page 8 of 46

4/15/2012

F 1 2 3 4 5 example to illustrate each answer. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47

Page 9 of 46

4/15/2012

F 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66

Page 10 of 46

4/15/2012

Answer: (a)

A golden parachute is an extremely lucarative practice by the target company, where the target company pays a hefty amount to its manager as a compensation package. Due to this the targe company loks costly for the acquirer. For example Ronald Perelman sucessfully acquired Revelon Corporation and the chareman for Revelon Corporation was paid a huge $35 million and this made the company less attractive in the eyes of the shareholders. As far as poision pill is concerned, it is a right offering where the company gives right to its existing shareholders to buy shares in either the target or the acquirer at a deeply discounted price if the certain conditions are met. For example Martin Lipton sucessfully foild the bid for takeover attempt of El Paso Electric by General american Oil.

(b)

A friendly merger is a merger where both the companies the target company and the acquirer agreed for merger to get economies of scale, greater market share, increased revenue etc for their respective companies. Here a negotiable setellement is done between the two companies. For example Walt Disney Corporation bought Pixer Animation Studios and as the Pixer shareholders all aproved the merger, it was a friendly merger. Hostile merger occurs when acquirer tries to takeover another company but fails to do so then in this situation to reduce the further cost of their attempts both the companies end up with merger and this is called hostile merger. For example ArcelorMittal where Mittal attempted a hostile takeover bid to Arcelor but at the end both companies ended up with merger.

(c)

A vertical merger where two companies producing different goods or services for a specific produce merge with each other to achieve economies of scale in its production. For example a merger of Time Warner Incorporated with Turner Corporation. A horizontal merger is a merger where both companies produce and sell similar goods or services. This is done to increase market share. For example Daimler-Benz and Chrysler merger is a best example of horizontal merger. An acquiring company is a company who tries to acquire a target company by purchasing a large amount of shares to take position of its ownership. Example is Mittal Steel. A target company is a company that becomes target by the acquirer. For example Arcelor.

(d)

(e)

Purchase accounting is an accounting is an accounting where the focus of the acquiring company is the balance sheet of the combined entity, after acquisition the combined entity would record the asset and liabilities of the target company at the fair value instead of their historical costs. Whereas under pooling of interest accounting the main focus of the acquirer is the income statement of the combined entity, after acquisition the income statement for periods after close of the transaction are not subject to depreciation, goodwill amortization or the other charges that is attributed to the purchase price in excess of the fair value.

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51

C Final Examination FINC 5880 Week 9

Problem 3. (20 points) Campbell Company's balance sheet and income statement are shown below (in millions o The company and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the will be exchanged for one share of $1.50 preferred with a par value of $50 plus one 10 percent subordinated inco debenture with a par value of $50. The $6 preferred issue will be retired with cash. Balance Sheet Current Current Assets Net fixed assets 250.0 195.0

Total assets

445.0

Income Statement Net sales Operating expense Net operating income Other income Current 600.0 550.0 50.0 10.0

EBT Taxes Net income Dividends on $4 PS Dividends on $6 PS Income to Common SHs

60.0 9.0 51.0 4.0 4.8 42.2

15%

a. Construct the pro forma balance sheet after reorganization takes place. Show the new preferred at

Page 12 of 46

4/15/2012

A 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67

b. Construct the pro forma income statement after reorganization takes place. How does the recapit net income available to common stockholders?

Page 13 of 46

4/15/2012

A B C 68 69 70 71 72 73 74 75 76 c. What are the required pre-tax earnings before and after the reorganization? 77 78 79 80 81 82 83 84 85 86 87 88 89 d. Calculate the debt ratio before and after the reorganization? 90 91 92 93 94 95 96 97

Page 14 of 46

4/15/2012

D E 1 Final Examination 2 FINC 5880 3 Week 9 4 5 mpany's balance sheet and income statement are shown below (in millions of dollars). greed upon a 6 voluntary reorganization plan. In this plan, each share of the $4 preferred 50 preferred with a par value of $50 plus one 10 percent subordinated income 7 e $6 preferred8issue will be retired with cash. 9 10 11 Current 12 Current liabilities 275.0 13 Advance payments 15.00 14 $4 preferred stock, $100 par value (1,000,000) shares 100.0 15 $6 preferred stock, no par, callable at 10 (800,000 shares) 8.0 16 Common stock, $0.50 par value (20,000,000) shares 10.0 17 Retained earnings 37.0 18 Total claims 445.0 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 ce sheet after reorganization takes place. Show the new preferred at its par value. 44 45 46 47 48 49 50 51

Page 15 of 46

4/15/2012

D E 52 53 54 55 56 57 58 59 60 me statement after reorganization takes place. How does the recapitalization affect 61 stockholders? 62 63 64 65 66 67

Page 16 of 46

4/15/2012

D 68 69 70 71 72 73 74 75 earnings before and after the reorganization? 76 77 78 79 80 81 82 83 84 85 86 87 88 and after the89 reorganization? 90 91 92 93 94 95 96 97

Page 17 of 46

4/15/2012

In (million, $) Current asset Net Fixed asset

Current $250.00 $195.00

Total Assets Income Statement Net sales Operating Expense Net operating Income Other Income EBT Taxes Net Income Dividend on $4 PS Dividend on $6 PS Income to common SHs (a) After Reorganization: In (million, $) Current asset

$445.00

Current $600.00 $550.00 $50.00 $10.00 $60.00 $9.00 $51.00 $4.00 $4.80 $42.20

After Reorganization $250.00

Net Fixed asset

$195.00

Total Assets (b) After Reorganization: Income Statement Net sales Operating Expense Net operating Income Other Income

$445.00

After Reorganization $600.00 $550.00 $50.00 $10.00

EBIT Interest payment EBT Taxes Net Income Dividend on $1.5 PS Dividend on $6 PS Income to common SHs

$60.00 $5.00 $55.00 $8.25 $51.75 $1.50 $4.80 $45.45

(c) (d)

The required pre-Tax earnign before reorganization is $60 million and after reorganization the pre-tax earning is $ Before Reorganization After Reorganization 0.00% 11.24%

Debt ratio (e)

Yes the common share holders would be in favor of the reorganization because the earning per share of the comm

Current liabilities Advance payments $4 preferred stock, $100 par value (1,000,000) shares $6 preferred stock, no par, callable at 10 (800,000 shares) Common stock, $0.50 par value (20,000,000) shares Retained earnings Total Claims

Current $275.00 $15.00 $100.00 $8.00 $10.00 $37.00 $445.00

Current liabilities 10% subordinate income Debenture, $50 par value Advance payments $1.5 preferred stock, $50 par value (1,000,000) shares $6 preferred stock, no par, callable at 10 (800,000 shares) Common stock, $0.50 par value (20,000,000) shares Retained earnings Total Claims

After Reorganization $275.00 $50.00 $15.00 $50.00 $8.00 $10.00 $37.00 $445.00

nization is $60 million and after reorganization the pre-tax earning is $55 million. After Reorganization

avor of the reorganization because the earning per share of the common shareholders is increasing.

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46

Final Examination FINC 5880 Week 9

Problem 4. (20 points) A Treasury bond futures contract settles at 105-8. a. What is the present value of the futures contract?

b. If the contract settles at 105-8, are current market interest rates higher or lower than the standardized rate on a futures contract? Explain.

c. What is the implied annual interest rate on the futures contract?

d. Calculate the new value of the futures contract if interest rates increase by 1 percentage point annually.

Page 22 of 46

4/15/2012

47 48 49 50 e. Calculate your profit or loss if you sold a futures contract at 105-8 and purchased an offsetting contract 51 when rates increased by 1 percentage point annually. 52 53

Page 23 of 46

4/15/2012

G 1 2

3 4 5 6 7 8 9 10 11 12 13 14 ndardized rate on a 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 nt annually. 39 40 41 42 43 44 45 46 Page 24 of 46 4/15/2012

47 48 49 50 ng contract 51 52 53

Page 25 of 46

4/15/2012

Answer: Bond face value in future Years to maturity Interest payment per year Current cost of debt Bond quote market price of the bond a) b) Present value of the bond $100,000.00 20 years 2 6% 105-8 $105.25 $105,250.00

As the market price is hogher than the par value we can say that the current market interest rates is higher than th a futures contract.

c)

Wen have, For semiannual payment Number of payments Coupon rate YTM Number of payments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

40 3% 2.78% Cash flow PV Factor @ YTM PV of cash flow $3,000.00 0.97294389 $2,918.83 $3,000.00 0.946619813 $2,839.86 $3,000.00 0.921007963 $2,763.02 $3,000.00 0.89608907 $2,688.27 $3,000.00 0.871844385 $2,615.53 $3,000.00 0.848255668 $2,544.77 $3,000.00 0.825305169 $2,475.92 $3,000.00 0.802975621 $2,408.93 $3,000.00 0.781250224 $2,343.75 $3,000.00 0.760112632 $2,280.34 $3,000.00 0.739546941 $2,218.64 $3,000.00 0.719537678 $2,158.61 $3,000.00 0.700069787 $2,100.21 $3,000.00 0.681128622 $2,043.39 $3,000.00 0.662699931 $1,988.10 $3,000.00 0.644769848 $1,934.31 $3,000.00 0.627324884 $1,881.97 $3,000.00 0.610351913 $1,831.06 $3,000.00 0.593838165 $1,781.51 $3,000.00 0.577771214 $1,733.31 $3,000.00 0.562138972 $1,686.42 $3,000.00 0.546929678 $1,640.79 $3,000.00 0.532131889 $1,596.40 $3,000.00 0.51773447 $1,553.20 $3,000.00 0.503726589 $1,511.18

26 $3,000.00 27 $3,000.00 28 $3,000.00 29 $3,000.00 30 $3,000.00 31 $3,000.00 32 $3,000.00 33 $3,000.00 34 $3,000.00 35 $3,000.00 36 $3,000.00 37 $3,000.00 38 $3,000.00 39 $3,000.00 40 $103,000.00 Current price of the bond

0.490097707 0.476837569 0.463936199 0.45138389 0.439171198 0.427288934 0.415728157 0.404480171 0.39353651 0.382888943 0.372529458 0.36245026 0.352643766 0.343102597 0.333819575

$1,470.29 $1,430.51 $1,391.81 $1,354.15 $1,317.51 $1,281.87 $1,247.18 $1,213.44 $1,180.61 $1,148.67 $1,117.59 $1,087.35 $1,057.93 $1,029.31 $34,383.42 $105,250

Effective annual YTM

5.64%

The implied interest rate d) We have, Number of payments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

0.36%

Cash flow Annual YTM Semiannual YTM $3,000.00 5.64% 2.82% $3,000.00 2.82% $3,000.00 6.64% 3.32% $3,000.00 3.32% $3,000.00 7.64% 3.82% $3,000.00 3.82% $3,000.00 8.64% 4.32% $3,000.00 4.32% $3,000.00 9.64% 4.82% $3,000.00 4.82% $3,000.00 10.64% 5.32% $3,000.00 5.32% $3,000.00 11.64% 5.82% $3,000.00 5.82% $3,000.00 12.64% 6.32% $3,000.00 6.32% $3,000.00 13.64% 6.82% $3,000.00 6.82% $3,000.00 14.64% 7.32% $3,000.00 7.32% $3,000.00 15.64% 7.82% $3,000.00 7.82%

23 $3,000.00 24 $3,000.00 25 $3,000.00 26 $3,000.00 27 $3,000.00 28 $3,000.00 29 $3,000.00 30 $3,000.00 31 $3,000.00 32 $3,000.00 33 $3,000.00 34 $3,000.00 35 $3,000.00 36 $3,000.00 37 $3,000.00 38 $3,000.00 39 $3,000.00 40 $103,000.00 Value of the contract

16.64% 17.64% 18.64% 19.64% 20.64% 21.64% 22.64% 23.64% 24.64%

8.32% 8.32% 8.82% 8.82% 9.32% 9.32% 9.82% 9.82% 10.32% 10.32% 10.82% 10.82% 11.32% 11.32% 11.82% 11.82% 12.32% 12.32%

(e)

We have, Sales proceeds after selling the t-bond Cost of purchasing new offsetting contract So total profit due to this activity

$105,250.00 $41,441.78 $63,808.22

est rates is higher than the standardized rate on

PV factor @ YTM PV of cash flows 0.972578011 $2,917.73 0.945907987 $2,837.72 0.906677661 $2,720.03 0.87754734 $2,632.64 0.829096359 $2,487.29 0.798593939 $2,395.78 0.743774126 $2,231.32 0.712976975 $2,138.93 0.654667322 $1,964.00 0.624566254 $1,873.70 0.565460946 $1,696.38 0.536900443 $1,610.70 0.479341465 $1,438.02 0.452980211 $1,358.94 0.398845925 $1,196.54 0.37513896 $1,125.42 0.325791483 $977.37 0.304992473 $914.98 0.261279073 $783.84 0.243459049 $730.38 0.205757225 $617.27 0.190834863 $572.50

0.159127663 0.146905811 0.120873275 0.111076836 0.090190778 0.082501992 0.066114057 0.060202466 0.04761867 0.043164321 0.033702633 0.030412182 0.023442516 0.021058766 0.016026864 0.014332797 0.01077076 0.009589393

$477.38 $440.72 $362.62 $333.23 $270.57 $247.51 $198.34 $180.61 $142.86 $129.49 $101.11 $91.24 $70.33 $63.18 $48.08 $43.00 $32.31 $987.71 $41,441.78

Final Examination FINC 5880

Week 9

Question 5. (15 points) Your portfolio is diversified . It has an expected return of 11.0% and a beta of 1.10. You want to add 300 shares of Tundra Corporation at $40 a share to your portfolio. Tundra has an expected return of 13.0% and a beta of 1.50. The total value of the investor's current portfolio is $45,000. a. Calculate the expected return on the portfolio after the purchase of the Tundra stock?

b. Calculate the expected beta on the portfolio after you add the new stock?

Page 32 of 46

4/15/2012

c. Is your portfolio less risky or more risky than average? Explain.

d. Will your portfolio likely outperform or underperform the market in a period when stocks are rapidly falling in value?

e. Is beta always an accurate predictor of a portfolio's performance? Explain? .

Page 33 of 46

4/15/2012

ur portfolio.

Page 34 of 46

4/15/2012

Page 35 of 46

4/15/2012

(a) (b) (c)

(d) (e)

Diversified portfolio Expected return on portfolio Portfolio beta Value of current portfolio Tundra Corporation: Number of shares to be added in portfolio Price per share Expected return Beta Total value of tundra stock Expected return on portfolio after adding Tundra stock Expected Beta on portfolio after adding Tundra stock

The portfolio looks to be mor risky than the previous one and less risky than average and this can be explained through the va beta is 1.18 and this says that its 1.18 times more volatile than the average index risk with beta 1.

This portfolio is likely to underperform the market when the stocks are rapidaly falling because of its beta is higher than mark

No, beta is not always an accurate predictor of a portfolio's performance because it only reflect the movement of stock or po better predictor of risk is coefficient of covariance that frid out risk per unit return.

11% 1.1 $45,000.00

300 $40.00 13% 1.5 $12,000.00 11.42% 1.18

xplained through the value of beta. The new portfolio

beta is higher than market.

ovement of stock or portfolio agains the market. The

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44

Final Examination FINC 5880 Week 9

Question 6. (15 points) Calhoun Resorts is interested in developing a new facility in Toronto. The company est initial investment of $10 million. The company expects that the facility will produce positive cash flows of $2,71 next 5 years. The project's cost of capitl is 11%. a. Calculate the expected net present value of the project.

b. The compaqny recognizes that the cash flows could be higher or lower than 2,710,000, depending on whethe facility tax. The company will know in one year whether the tax will be imposed. There is a 30 percent chance tha case the yearly cash flows will be only $2.5 million. At the same time, there is a 70 percent chance that the tax wi yearly cash flows will be $3.2 million. The company is deciding whether to proceed with the facility today or to w will be imposed. If it waits year, the initial investment will remain at $10 million and positive cash flows will contin flows are discounted at 11 percent. Using decision tree analysis, calculate the value of the real option to wait a y

FINC 5880

Page 39 of 46

4/15/2012

45 46 47 c. Discuss 2-3 factors other than the value of the real option that the company should consider in making its dec 48 49 50 51 52 53 54 55 56

FINC 5880

Page 40 of 46

4/15/2012

xamination 1 C 5880 2 eek 9 3

4 5 6 cility in Toronto. The company estimates that the hotel would require an 7 oduce positive cash flows of $2,710,000 a year at the end of each of the 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 n 2,710,000, depending on whether the host government imposes a 26 . There is a 30 percent chance that the tax will the imposed, in which 70 percent chance that the tax will not be imposed, in which case the 27 ceed with the28 facility today or to wait 1 year to find out whether the tax and positive cash flows will continue for 5 years. Assume that all cash 29 value of the real option to wait a year before deciding. 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 FINC 5880 Page 41 of 46 4/15/2012

E 45 46 47 should consider in making its decision. 48 49 50 51 52 53 54 55 56

FINC 5880

Page 42 of 46

4/15/2012

Initial investment Cash inflow per year for 5 years Cost of capital (a) Year

$10,000,000.00 $2,710,000.00 11% Cash flow PV factor @ 11% cash flow PV of 0 -$10,000,000.00 1 -$10,000,000.00 1 $2,710,000.00 0.900901 $2,441,441.44 2 $2,710,000.00 0.811622 $2,199,496.79 3 $2,710,000.00 0.731191 $1,981,528.64 4 $2,710,000.00 0.658731 $1,785,160.94 5 $2,710,000.00 0.593451 $1,608,253.10 $15,880.92

NPV of the project

(b)

If tax is imposed: Initial investment Cash inflow per year for 5 years Cost of capital Year

$10,000,000.00 $2,500,000.00 11% Cash flow PV factor @ 11% cash flow PV of 0 -$10,000,000.00 1 -$10,000,000.00 1 $2,500,000.00 0.900901 $2,252,252.25 2 $2,500,000.00 0.811622 $2,029,056.08 3 $2,500,000.00 0.731191 $1,827,978.45 4 $2,500,000.00 0.658731 $1,646,827.44 5 $2,500,000.00 0.593451 $1,483,628.32 -$760,257.46

NPV of the project If tax is not imposed: Initial investment Cash inflow per year for 5 years Cost of capital Year

$10,000,000.00 $3,200,000.00 11% Cash flow PV factor @ 11% cash flow PV of 0 -$10,000,000.00 1 -$10,000,000.00 1 $3,200,000.00 0.900901 $2,882,882.88 2 $3,200,000.00 0.811622 $2,597,191.79 3 $3,200,000.00 0.731191 $2,339,812.42 4 $3,200,000.00 0.658731 $2,107,939.12 5 $3,200,000.00 0.593451 $1,899,044.25 $1,826,870.46

NPV of the project Decision tree:

Tax is imposed

Tax is imposed Probability=30%

Year 1 NPV=-$760,257.46

Year 0 NPV=$15,880.92

Tax is not imposed Probability=70%

NPV=$1,826,870 Year 1

Based on this analysis we can say that the company should wait for one years. (c) The other factors that the company should consider are: (i)Use of inflation in calculating cost of capital (ii) Use of efficient capital structure to get the lowest cost of capital possible. (ii) A through market research of the project.

Year 1 NPV

$1,050,732.08