Cold Goose Metal Works Inc. is considering a one-year project that requires an initial investment of $500,000; however, in raising this capital, Cold Goose will incur an additional flotation cost of 4%. At the end of the year, the project is expected to produce a cash inflow of $600,000. The rate of return that Cold Goose expects to earn on the project after its flotation costs are taken into account is

The rate of return expected on this project by Cold Goose Metal Works Inc. is 15.20%

Explanation:

Since flotation cost is 4% that implies that $500,000 is actually 96% (100%-4%) of the cash proceeds from the capital funding,hence funds raised is computed thus:

funds raised=$500,000/0.96=$520,833.33  

Annual return on investment=cash inflow-initial cash outflow

cash inflow is $600,000

cash outflow  is $520,833.33  

annual return on investment=$600,000-$520,833.33=$79166.67

rate of return on project=annual return on investment/initial investment

                                        =$79,166.67 /$520,833.33*100=15.20%

The rate of return that Cold Goose Metal Works Inc is 15.20%

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