Question

Alpha Moose Transporters is considering investing in a one-year project that requires an initial investment of $475,000. To do so, it will have 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 $595,000. The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is ___________

Answer 1

22.76%

Step-by-step explanation:

Calculation to determine what The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is

First step is to calculate Total amount raised Using this formula

Total amount raised = Initial investment/(1-Flotation cost)

Let plug in the formula

Total amount raised= $475,000/(1-2%)

Total amount raised=$475,000/0.98

Total amount raised= $484,694

Now let calculate the Rate of return

Rate of return = (595,000- $484,694)/$484,694

Rate of return=110306/$484,694

Rate of return= 22.76%

Therefore The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is 22.76%