Question

A firm has a target debt-equity ratio of.37. The cost of debt is 9% and the cost of equity is 15%. The company has a 34% tax rate. A project has an initial cost of $70,000 and an annual after-tax cash flow of $21,000 for six years. There is no salvage value or net working capital requirement. What is the net present value of the project using the WACC?

a.15942

b.14092

c.14899

d.15513

e.15011

Answer #1

Debt / Total Value = 0.37/1.37 | |||||||

Equity / Total Ration = 1/1.37 | |||||||

WACC = 0.37/1.37*9*(1-34%) + 1 /1.37 * 15 = 12.55% | |||||||

Net present value of the project using the WACC | |||||||

= $ 21000 * PVAF (12.5538% , 6 yrs) - $ 70000 | |||||||

= $ 21000 * 4.0477 - $ 70000 | |||||||

= 15011 (approx) | |||||||

Note - Exact answer = 15002 | |||||||

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