Question

Waterdeep Adventure Travel has an unlevered cost of equity of 18.8%, and a cost of debt of 6.1%. Their tax rate is 36%, and they maintain a capital structure of 52% debt and the rest equity. They are considering giving cave exploration tours to their menu of adventure vacations. Buying the needed equipment would cost $53,584, and would bring in $22,809 one year from today, and $88,237 two years from today. What is the NPV of this project, using the WACC method, if they invest today?

Please give your answer to the nearest dollar.

Answer 1

WACC= We*Re + Wd*Rd*(1-T)

Where We= Weight of equity in capital structure, Re= Cost of equity, Wd= Weight of debt, Rd= Cost of debt and T= Tax rate.

Given, Proportion of debt (Wd)= 52%. Therefore, We= 1-0.52= 0.48

Also given, Re= 18.8%, Rd=6.1% and T=36%

Therefore, WACC= 0.48*0.188 + 0.52*0.061*(1-0.36) = 11.0541%

NPV of the project= $38,500 as follows: