Question

Green Caterpillar Garden Supplies Inc. is considering a one-year project that requires an initial investment of $600,000; however, in raising this capital, Green Caterpillar will incur an additional flotation cost of 2%. At the end of the year, the project is expected to produce a cash inflow of $840,000. The rate of return that Green Caterpillar expects to earn on the project after its flotation costs are taken into account is:________

a. 29.80
b. 22.35
c. 37.25
d. 33.53

Answer 1

c. 37.25%

Step-by-step explanation:

Calculation to determine what Caterpillar expects to earn on the project after its flotation costs are taken into account is

First step

Net investment = Additional investment*(1 + Flotation cost rate)

Net investment= $600,000*(1 + 0.02)

Net investment= $612,000

Now let Compute the rate of return (ROR), using this formula

ROR = (Cash inflows – Net investment)/ Net investment

Let plug in the formula

ROR = ($840,000 - $612,000)/ $612,000

ROR = $228,000/ $612,000

ROR=37.25%

Therefore Caterpillar expects to earn on the project after its flotation costs are taken into account is 37.25%.