Question

ABC Inc. has a weighted average cost of capital (WACC) of 11.10%. It is considering investing...

ABC Inc. has a weighted average cost of capital (WACC) of 11.10%. It is considering investing in a new project with the same riskiness as the firm. The project will generate free cash flows in year 1 of $13,650,000. The free cash flows are expected to grow by 3.70% in perpetuity. The cost of the project is $172,000,000. This cost will be incurred at time 0, today. What is the net present value (NPV) of the project?

Homework Answers

Answer #1

NPV $ 12,459,459

Step-1:Present Value of annual cash inflow
Present Value of cash inflow = Year 1 Cash inflow / (Ke-g)
= $          1,36,50,000 / (0.1110-0.0370)
= $          1,36,50,000 / 0.074
= $       18,44,59,459
Where,
Ke = WACC = 11.10%
g = Growth rate in annual cash inflow = 3.70%
Step-2:Calculation of NPV of project
Present Value of cash inflow $       18,44,59,459
Present Value of cash outflow $       17,20,00,000
Net Present Value $          1,24,59,459
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