Cold Goose Metal Works Inc. expects a 15.20% return on this project.
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The flotation cost is 4%, hence $500,000 represents 96% (100% - 4%) of the cash revenues from the capital fundraising; thus, the fund raised is calculated as follows:
- Fund raised: [tex]\frac{500,000}{0.96}[/tex] = $520,833.33
Next, we need to calculate the annual return. The formula that we have to use is:
- Annual Return on Investment = Cash Inflow - Initial Cash Outflow
It is informed that the cash inflow is $600,000 while the cash outflow obtained is $520,833.33. Thus, the annual return on investment is calculated as follows:
- = $600,000 - $520,833.33
- = $79166.67
In order to obtain the rate of return, we use the formula as follows:
- Rate of return = [tex]\frac{Annual Return on Investment}{Initial Investment}x 100[/tex]
- Rate of return = [tex]\frac{79,166.67}{520,833.33}x100[/tex]
- Rate of return = 15.20%
Cold Goose Metal Works Inc. expects a 15.20% return on this project after its flotation costs are taken into account.
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