Question

Suppose Firm A has a 28% cost of equity capital and 10% before tax cost of debt capital. The firm’s debt-to-equity ratio is 2.0. Firm A is interested in investing in a telecom project that will cost $1,000,000 and will provide $500,000 pretax annual earnings for 5 years. Given the project is an extension of its core business, the project risk is similar to the overall risk of the firm. What is the net present value of this project if Garageband’s tax rate is 35%?

Answer #1

WACC = weighted Avg cost of sources in Capital structure.

NPV = PV of Cash Inflows - PV of Cash Outflows

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