Question

Sunny Day Manufacturing Company is considering investing in a one-year project that requires an initial investment of $500,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $550,000. The rate of return that Sunny Day expects to earn on its project (net of its flotation costs) is _________________.

Answer 1

Rate of return= 8%

Step-by-step explanation:

The rate of return on the investment is the is the proportion of the investment that is made has net income.

Note the the flotation cost would deducted from the income along side the initial cost.

initial investment cost = $500,000

Flotation cost = 2% × $500,000 = $10,000

Net return = Cash inflow - Initial cost - flotation cost

= $550, 000 - 500,000- 10,000

= 40,000

Rate of return = Net income / cost of investment × 100

= 40,000/500,000× 100

= 8%