Answer:
$1.0725 Million
Explanation:
So now
Net Present Value = Annuity value of the even cash inflow - Investment
Here
Investment is $48 Million
Annuity Value of $13.5 Million Cash Inflow = $13.5 Million * Annuity factor for 5 years at 11.66%
Annuity factor = (1 - (1 + r)^ -n) / r
Here
r is 11.66% (Step1) and n is 5 years
Annuity Factor = (1 - (1 + 11.66%)^-5) / 11.66%
Annuity Factor = 3.635
By putting values in the above equation, we have:
Net Present Value = $13.5 Million * 3.635 - $48 Million
NPV = $1.0725 Million
Step1: Find r which Weighted average cost of capital (WACC)
Weighted Average Cost of capital
= Value of Debt / (V of debt + V of equity) * After tax cost of debt PLUS
(Value of equity (Value of Debt / (V of debt + V of equity) * cost of equity
Here
Post tax cost of debt = Pre tax cost of debt * (1 + Tax rate)
Post tax cost of debt = 9% * (1- 30%) = 6.3%
The debt to equity ratio is 25% which means equity is 100% and debt is 25%.
So
Value of debt is 25%
value of equity is 100%
and total value of capital structure is 125%
This means
WACC = (25% / 125% * 6.3%) + (100% / 125% * 13%)
= 1.26% + 10.4% = 11.66%
