What if analysis is a tool that allows a person to assess a range of outcomes based on multiple scenarios. This is often used by financial managers to assess the investments in which investors predict the projects’ viability based on the risk, availability of funds, and its cost of capital. By taking each scenario (project) in isolation under different factors like risk, funds, and cost of capital, the managers can assess the best outcome.
Assume that a project that offers cash flows of $5000 each year for 10 years if the investment is 60% financed by debt and 40% financed by equity. On the other scenario, the same project will offer $6000 for 8 years if financed by 40% debt and 60% equity. The managers will run the “what if analysis” to assess the viability using the cost of capital calculated with each capital structure.
Refer to the data given in Exercise 1–7. Answer
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