Company Z would invest in the project with the highest yield, 15%.
They as well would probably opt to borrow money from company W at a yield between 8% and 11% and invest it into the second project.
It would have to be at least 8% since otherwise company W would not lend their money.
It couldn't be more than 11% or else Y would get involved.
Profit for company Z would be $1,500,000 for their own money and their own project.
Profit for company Z’s second project would be calculated by:
Investment= $10,000,000*X where X is determined between company’s W and Z.
Profit = (($10,000,000*1.12) - $10,000,000*(1+X) =(.12-X)*$10,000,000
ROI = (.12-X)*$10,000,000/$10,000,000*(1+X).
= (.12-X)/(1+X)
Best case scenario for company Z is for X to be approximately 8% where the ROI for company Z’s second project would be approximately 3.7% or less depending on the value of X.
Worst case scenario for company Z is for X to be approximately 11% where the ROI for company Z’s second project would be approximately .9%
Provided that company Z’s ROI on project 2 is greater than their opportunity cost of capital they should take the deal.
This is what I come up with. However, I am kind of unsure if this is adventageous for company Z. Especially when I think to myself: if company Z waits a year and the project is still available they can make 12% on the investment rather that .9%-3.7%. There should also be a risk associated with these projects. The reason why they should borrow the money is that they are making money on money they don't really have.
Any other thoughts here?
[NEAS: The projects are available now. A firm can't wait for a year.]
Peace.