Question

Super corp. is considering a project that will result in initial after tax cash saving of $2.7 million at the end of the first year, and these savings will grow at a rate of 4 percent per year indefinitely. Super corp. has a target debt-equity ratio of 0.9, a cost of equity of 13%, and an after tax cost of debt of 4.8%. As the project is considered to be riskier than the firm’s existing projects, the management uses the subjective approach to add 1% to the cost of capital for the project under consideration. Calculate the NPV of the project if the project will cost $40 million of initial investment?

Answer 1

Savings	2,700,000
Growth rate	4%
D/E	0.9
Re	13%
Rd	4.80%
D/(D+E)	0.47
E/(D+E)	0.53
WACC	9.12%
Adjustment factor	1%
Adjusted WACC	10.12%
PV	44,148,020.65