Question

Panelli's is analyzing a project with an initial cost of $139,000 and cash inflows of $74,000 in Year 1 and $86,000 in Year 2. This project is an extension of current operations and thus is equally as risky as the current company. The company uses only debt and common stock to finance its operations and maintains a debt-equity ratio of .39 The aftertax cost of debt is 5.1 percent, the cost of equity is 13.2 percent, and the tax rate is 21 percent. What is the projected net present value of this project

Answer 1

Answer:

The projected net present value of this project is -$2,386

Explanation:

In order to calculate the projected net present value of this project First we have to calculate the WACC of the firm as follows:

WACC=[(Weight of common stock*Corresponding cost)+(Weight of debt *Corresponding cost)[cost of debt is after tax)]/Total weight

WACC=[(1.0*0.132)+(0.39*0.051)]/1.39

WACC=10.92%(approx)

NPV=Present value of cash inflows-Initial Investmet

Therefore, NPV={[$74,000/(1.1092)]+[$86,000/(1.1092)∧2]}-$139,000

NPV=$66,714+$69,900-$139,000

NPV=-$2,386

The projected net present value of this project is -$2,386