Question

Dyrdek Enterprises has equity with a market value of $12.1 million and the market value of...

Dyrdek Enterprises has equity with a market value of $12.1 million and the market value of debt is $4.20 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.7 percent. The new project will cost $2.46 million today and provide annual cash flows of $641,000 for the next 6 years. The company's cost of equity is 11.59 percent and the pretax cost of debt is 5.01 percent. The tax rate is 35 percent. What is the project's NPV?

Homework Answers

Answer #1

Cost of Equity = 11.59%, Cost of Debt = 5.01 % and Tax Rate = 35 %

Market Value of Equity = E = $ 12.1 million and Market Value of Debt = D = $ 4.2 million

Value of Firm = D + E = 4.2 + 12.1 = $ 16.3 million

Weighted Average Cost of Capital (WACC) = 11.59 x (12.1 / 16.3) + 5.01 x (4.2 / 16.3) x (1-0.35) = 9.44272 %

Risk Adjustment Factor (RAF) = 1.7 %

Therefore, Appropriate Project Discount Rate = WACC + RAF = 9.44272 + 1.7 = 11.1427 %

New Project Cost = $ 2.46 million and Annual Cash Flow = $ 641000

Project Tenure = 6 years

Therefore, NPV = 641000 x (1/0.111427) x [1-{1/(1.11427)^(6)}] - 2460000 = $ 287088.26

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