Question

AMC has a project that will last 7 years and have an initial investment of $1,400,000....

AMC has a project that will last 7 years and have an initial investment of $1,400,000. The after tax cash flows are estimated at $315,000 per year. The targeted debt-to-equity ratio of 1.5. Its pre-tax cost of equity is 14%, and its pre-tax cost of debt is 8%. The tax rate is 40%. Solve for NPV.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Debt to equity ratio=debt/equity

Hence debt=1.5equity

Let equity be $x

Hence debt =$1.5x

Total=$2.5x

After tax cost of debt=8(1-tax rate)

=8(1-0.4)=4.8%

WACC=Respective costs*Respective investment weight

=(x/2.5x*14)+(1.5x/2.5x*4.8)
=8.48%

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$315000[1-(1.0848)^-7]/0.0848

=$315000*5.121983187

=$1613424.70

NPV=Present value of inflows-Present value of outflows

=$1613424.70-$1,400,000

  =$213424.70(Approx).

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
4, A proposed project lasts three years and has an initial investment of $200,000. The after-tax...
4, A proposed project lasts three years and has an initial investment of $200,000. The after-tax cash flows are estimated at $82,120 for year 1, $163,560 for year 2, and $179,200 for year 3. The firm has a target debt/equity ratio of 1.35. The firm's cost of equity is 16.18% and its cost of debt is 11.38%. The tax rate is 34%. What is the NPV of this project?
Do a seven year project valuation given the information below.             Required return: WACC+1.5 percent...
Do a seven year project valuation given the information below.             Required return: WACC+1.5 percent             Initial investment: $7.4 million Yearly cash inflow: $1.54 million Cost of debt (pre-tax): 8.6% Cost of equity: 13.7% Debt-equity ratio:.0.65 Corporate tax rate: 35% Use NPV for the decision Answer choices are as follows: A) Accept because its NPV is $446,328 B) Reject because its NPV is -$372,963 C) Reject because its NPV is -$446,328 D) Accept because its NPV is $235,738
Super corp. is considering a project that will result in initial after tax cash saving of...
Super corp. is considering a project that will result in initial after tax cash saving of $2.7 million at the end of the first year, and these savings will grow at a rate of 4 percent per year indefinitely. Super corp. has a target debt-equity ratio of 0.9, a cost of equity of 13%, and an after tax cost of debt of 4.8%. As the project is considered to be riskier than the firm’s existing projects, the management uses the...
Mike wants to start his own business. The initial investment required is $75,000 and the project's...
Mike wants to start his own business. The initial investment required is $75,000 and the project's          beta is 1.1. The estimated annual net cash flows are given below: Year 1: 15,000 Year 2: 25,000 Year 3: 35,000 Year 4: 40,000 Mike can invest the same amount of funds in the market and expect to earn 12%, or he can purchase government securities and earn 6%. Assuming that Mike's after-tax cost of debt is 7% and his target debt to equity...
"The initial investment for a project is $133,000. The project will last for 7 years and...
"The initial investment for a project is $133,000. The project will last for 7 years and can be salvaged for $11,970 at the end of 7 years. The annual expenses for the project are $5,200 in year 1 and increase at an annual rate of 9% in each year of the project. Assume the annual revenue remains the same in each of the 7 years. What does the annual revenue need to be in order for the internal rate of...
What is the IRR of a project with the following characteristics? Initial investment is $2,000,000 Initial...
What is the IRR of a project with the following characteristics? Initial investment is $2,000,000 Initial investment is depreciated to $0 book value via straight-line over its 12 year life Project is expected to generate incremental sales of 1,900,000 per year, and incremental expenses of 1,400,000 per year There are no NWC or salvage cash flows The firm faces a 28% tax rate
Assume the firm’s debt−equity ratio is 200%. The project under consideration needs $600,000 initial cost. The...
Assume the firm’s debt−equity ratio is 200%. The project under consideration needs $600,000 initial cost. The firm can raise the fund by issuing common stock and debt. The cost of equity is 21%. The company can raise new debt at the cost of 9%. The flotation cost rate associated with equity is 9%, and the flotation cost rate associated with debt is 3%. This project will generate constant after-tax cash flows of $318,000 per year forever. Assume the tax rate...
Assume CAPM holds and you have the following information regarding three investment opportunities: Project 1 has...
Assume CAPM holds and you have the following information regarding three investment opportunities: Project 1 has a project beta of 2.0 and you have estimated that the project’s NPV using a cost of capital of 20% equals zero. Project 2 has a project beta of 1.5 and its NPV using a cost of capital of 10% equals zero. Project 3 has a project beta of 1.0 and its NPV equals zero using a cost of capital of 6%. None of...
A firm with no preferred stock outstanding has a debt-to-equity ratio of D/E = 1.25, an...
A firm with no preferred stock outstanding has a debt-to-equity ratio of D/E = 1.25, an effective annual before-tax cost of debt of 6.5%, and a cost of equity of 14.2%. Additionally, the firm faces a 32% tax rate. A firm is considering a project with zero NWC or salvage cash flows. What is the NPV of a project with an initial investment of $12 million that generates incremental after-tax cash flows of OCF= $2,000,000 per year over the project's...
Assume CAPM holds and you have the following information regarding three investment opportunities: Project 1 has...
Assume CAPM holds and you have the following information regarding three investment opportunities: Project 1 has a project beta of 2.0 and you have estimated that the project’s NPV using a cost of capital of 20% equals zero. Project 2 has a project beta of 1.5 and its NPV using a cost of capital of 10% equals zero. Lastly, project 3 has a project beta of 1.0 and its NPV equals zero using a cost of capital of 6%. None...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT