Question

Blue Water Boats is considering a new project with perpetual cash inflows of $435,000, cash costs of $310,000, and a tax rate of 35 percent. The firm plans to issue $250,000 of debt at an interest rate of 7.3 percent to help finance the initial project cost of $475,000. The levered discount rate is 16.7 percent. What is the net present value of this project?

Answer 1

Answer:

$190,494.01

Explanation:

The calculation of net present value is given below:-

Perpetual cash flow          $435,000

Less: Cash cost                 $310,000

Earning before interest

and tax                               $125,000

($435,000 - $310,000)

Less: Interest on debt       $18,250

($250,000 × 7.3%)

Earning before tax            $106,750

($125,000 - $18,250)

Less: Tax                            $37,362.50

($106,750 × 35%)

Net Income                       $69,387.50

($106,750 - $37,362.50)

Present value                    $415,494.01

($69,387.50 ÷ 16.7%)

Less: Initial cost                 $225,000

($475,000 - $250,000)

Net present value              $190,494.01

( $415,494.01 -  $225,000)