Answer:
The PV of future cash flow is $22,925,764, therefore the company should take on the project
Explanation:
In order to know if the company should take on the project we have to calculate the PV of future cash flow as follows:
PV of future cash flow=<u> D1 </u>
RE-g
To calculate this formula we requre to calculate the WACC and the discount rate as follows:
WACC=(1.00/1.80×0.11)+0+(0.80/1.80×0.046)
WACC=0.0611+0+0.02044
WACC=0.081556
WACC=8.16%
After having calculated the WACC we can calculate the project discount rate as follows:
project discount rate=WACC + Additional risk factor
=8.16%+3%
=11.16%
Therefore, PV of future cash flow= <u>$2,100,000</u>
0.1116-0.02
PV of future cash flow= <u>$2,100,000</u>
0.0916
PV of future cash flow=$22,925,764
The PV of future cash flow is $22,925,764, therefore the company should take on the project
