Question

cromwell's Interiors is considering a project that is equally as risky as the firm's current operations. The Firm has a cost of equity of 15.4% and a pre-tax cost of debt of 8.9%. The debt equity ratio is .46 what's the tax rate is 21%. They are evaluating a project that will cost $60,000 and will cash inflows of $20,000, $30,000, $40,000, respectively for the three years of the project what is the net present value for this project?

Answer 1

Cost of debt after-tax=8.9*(1-tax rate)

=8.9*(1-0.21)=7.031%

Debt-equity ratio=debt/equity

Hence debt=0.46*equity

Let equity be $x

Debt=$0.46x

Total=$1.46x

WACC=Respective cost*Respective weight

=(x/1.46x*15.4)+(0.46x/1.46x*7.031)

=12.7631918%(Approx)

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=20,000/1.127631918+30,000/1.127631918^2+40,000/1.127631918^3

=69226.49

NPV=Present value of inflows-Present value of outflows

=69226.49-60,000

=$9226.49(Approx).