Discuss the impact of taxation and the Impact of inflation in the calculation of the cost of capital.

Discuss the impact of taxation and the Impact of inflation in the calculation of the cost of capital.
You have to answer the 3 questions of the first Coursework. Present clearly your calculations in the numerical questions. It is good to use some plain language to briefly explain what you calculate and why. In the theoretical part of the questions consider using evidence from the literature (from the university’s online library).

Question 1: You are the financial manager of an organisation and are planning to invest £20,000 on a new piece of machinery. This machinery will have a useful economic life of 5 years and the cash flows associated with it are expected to be £4,300 annually. The discount rate is 2% (for part b).

Required
a. Calculate the IRR of the project
b. If there is a 18% WDA for the above investment and the corporate Tax Rate is 20%, calculate the NPV of the project at the end of the 5th year.
c.
Question 2: You are managing an equal-weighted portfolio of stocks (A&B) on behalf of your company’s treasury. Assume that stock A and stock B are two risky assets. C is a risk-free asset. The details of these stocks are below:
Stock A Stock B C (Risk-free asset rf)
Average return 7.00% 15.00% 2.00%
Variance of return 0.0064 0.0196
Sigma of return 8.00% 14.00%
Covariance of returns 0.0011

Required
Using the information in the above stated table calculate the following:
a. Expected market portfolio return, E (RM) and the market excess return.
b. The Sharpe ratio
Question 3:
a) Explain the role of inflation in cash flows. Focus specifically on the impact of inflation on the cash flows of a project investment.
b) Discuss the impact of taxation and the impact of inflation in the calculaticixon of the cost of capital.

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