Question 6 5 Amber Company is considering a oneyear project

Question 6 5 Amber Company is considering a one-year project that requires an initial investment of $S00.000. However, to raise this capital, the company will incur flotation cost that are 2% of the initial investment amount. At the end of the year, the project is expected to produce a cash inflo v of $554,000 what is the rate of return that the company expects to earn on this project after taking flotation costs into consideration? Your answer should be between 7.32 and 16.60, rounded to 2 decimal places, with no special characters

Solution

Initial Investment = $500,000

Including FLoatation COst, investment = $500,000 * 1.02 = $510,000

Cash inflow = 554,000

Total Return = (FInal investment - Initial Investment)/Initial Investment = (554,000 - 510,000)/510,000 = 8.63%