Question

Suppose company is considering an investment in a facility of $65,000,000. Suppose the invested is expected to return cash in the following manner Year Year Year Suppose in order to finance this investment they plan on using a combination of cash and stock. Our bankers have advised the company to issue 60% bonds at a rate of 3.5%, and 40% stock at a rate of 19% Is the project worth considering? Why or why not? (answer must have the actual NPV figure)

Answer 1

Calculation of WACC : (Weight of Debt * Rate ) + (Weight of Equity* Rate )

WACC = 0.60 * 3.5% + 0.40 * 19% = 9.70%

Cash flow at year 0 = $65 Million

PV = Cash flow (CF) / (1+ wacc%) ^ no. of years

PV of CF at year 1 = 17 million / (1+9.7%)^1 = $15.50 million (A)

PV of CF at year 2 = 23 million / (1+9.7%)^2 = $19.11 million (B)

PV of CF at year 3 = 18 million / (1+9.7%)^3 = $13.63 million (C)

PV of CF at year 4 = 12 million / (1+9.7%)^4 = $8.29 million (D)

NPV = CF at year 0 - (A+B+C+D)

NPV = $65 million - $56.53 million

NPV = $8.47 million or $8,469,710.92

Project can be accepted.