Question

Weights:	Cost of Capital	Market Value	Weights
After tax cost of bank loan	1.29%	$500	3.33%	0.04%
After tax cost of long-term debt	2.31%	$2,500	16.67%	0.39%
Cost of Common Equity	8.64%	$12,000	80.00%	6.91%
		$15,000	WACC =	7.34%

Free Cash Flow

(16,000,000)

400,000

3,900,000

4,500,000

4,500,000

4,500,000

6,580,000

2016-2022

1. What discount rate should Worldwide Paper Company (WPC) use to analyze those cash flows? Explain your recommended rate and the assumptions that you used to estimate it.
2. What is the net present value (NPV) and internal rate of return (IRR) for the investment? How do you interpret these numbers?

Answer 1