Question

Watson, Inc., is an all-equity firm. The cost of the company’s equity is currently 13 percent, and the risk-free rate is 4.1 percent. The company is currently considering a project that will cost $11.58 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.26 million.

  

If the company has a tax rate of 40 percent, what is the net present value of the project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Net present value

$???

Answer 1

All the numbers are in million

Revenue - Expenses	3.26
Depreciation	1.93
EBT	1.33
Tax	0.532
After tax cash flow	0.798

As we are given Revenue - Expenses, we are assuming that the depreciation is already included in the expenses.

NPV is the sum of present value of all the cash flows.

PV = Cash flow at time n / ((1+r)^n)

Years	Cash flows	PV
0	-11.58	-11.58
1	0.798	0.71
2	0.798	0.62
3	0.798	0.55
4	0.798	0.49
5	0.798	0.43
6	0.798	0.38
Cost of equity		13%
NPV		-8.39

-8389955.27 is the NPV