Question

Walker, Inc., is an all-equity firm. The cost of the company’s equity is currently 11.5 percent and the risk-free rate is 4.4 percent. The company is currently considering a project that will cost $11.94 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.55 million.

  

If the company has a tax rate of 23 percent, what is the net present value of the project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

Answer 1

after tax revenue = Before tax revenue * (1- tax rate)

= 3550000 * (1-0.23)

= 2733500

Depreciation Tax shield = Cost of project/life of project * tax rate

= 11940000/6 * 0.23

= 457700

Present value of annuity= payment per period * [1-(1+i)^-n]/i  

i = interest rate per period

n = number of periods

Net Present value = PV of depreciation tax shield + PV of after tax revenue - Initial Cost

= 457700 * [1-(1+0.044)^-6]/0.044 + 2733500 * [1- (1+0.115)^-6]/0.115 - 11940000

= 2368394.51342 + 11399498.7397 - 11940000

= 1827893.25