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olasank [31]
3 years ago
9

Carson Electronics uses65 percent common stock and 35 percent debt to finance its operations. The aftertax cost of debt is 5.8 p

ercent and the cost of equity is 16.1 percent. Management is considering a project that will produce a cash inflow of $42,000 in the first year. The cash inflows will then grow at 3 percent per year forever. What is the maximum amount the firm can initially invest in this project to avoid a negative net present value for the project?
Business
1 answer:
Lina20 [59]3 years ago
8 0

Answer:

$471,319.20

Explanation:

Carson's WACC = (0.65 x 16.1%) + (0.35 x 5.8%) = 10.47 + 2.03 = 12.5%

The PV of the investment = CF / (1 + wacc) + {[CF / (wacc - g)] / (1 + wacc)}

PV = $46,000 / 1.125 + {[$46,000 / (9.5%)] / 1.125}

PV = $40,890.71 + ($484,210.53 / 1.125)

PV = $40,890.71 + $430,428.49 = $471,319.20

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