Question

You are planning a new project that is to be entirely financed by issuing new debt....

You are planning a new project that is to be entirely financed by issuing new debt. The project will require $19.16 million in financing and you estimate its NPV to be $15.465
million. The issue costs for the debt will be 3.1% of face value. Taking into account the costs of external​ financing, what is the NPV of the​ project?

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Answer #1

The Net Present value refers to the present value of all the cash flow that the machine is going to generate in future.

Net Present Value = Present Value of all cash flows - Initial Investment

We have given NPV = 15.465 Million

The Cost of debt will reduce the Net Present Value as it is a cash outflow.

NPV with Cost of Debt = NPV without cost of debt - (Cost of Debt * face value of debt)

= 15.465 - (3.1%*19.16)

= 14.87104 Million

NPV with cost of debt = 14.87104 millions

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