Question

considering a project that is equally as risky as the firm's current operations. The firm has a cost of equity of 15.4 percent and a pretax cost of debt of 8.9 percent. The debt-equity ratio is .46 and the tax rate is 21 percent. They are evaluating a project that will cost $60,000 and will cash inflows of $20,000, $30,000 and $40,000 respectively for the three years of the project. What is the net present value for this project?

Answer 1

Answer:

$9230.70

Explanation:

Debt ratio = Debt equity ratio / (Debt equity ratio+1) = 0.46/(0.46+1) = 0.46/1.46

Equity ratio = 1/(Debt equity ratio+1) = 1/(0.46+1) = 1/1.46

WACC = 15.4%×1/1.46+8.9%×(1-21%)×0.46/1.46 = 12.76%

Net present value = 20000/(1+12.76%) + 30000/(1+12.76%)^2 + 40000/(1+12.76%)^3 - 60000 = $9230.70