Question

Walker, Inc., is an all-equity firm. The cost of the company’s equity is currently 11 percent and the risk-free rate is 2.9 percent. The company is currently considering a project that will cost $11.49 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.25 million. |

If the company has a tax rate of 23 percent, what is the net
present value of the project? |

Net present value:

Answer #1

Depreciation = (Cost - Salvage Value ) / Useful Life

= (11.49-0)/6

= $ 1.915Million

Cash Flow = [ (Revenue - expenses) * (1-tax rate) ] +( Depreciation * Tax Rate)

= [ (3.25)*(1-23%)]+(1.915*23%)

= $ 2.94295 Million

net present value = Present Value of Cash Inflows - Present Value of Cash Outflows

= [2.94295 *1/(1.11)^1+2.94295 *1/(1.11)^2+2.94295 *1/(1.11)^3+2.94295 *1/(1.11)^4+2.94295 *1/(1.11)^5+2.94295 *1/(1.11)^6]-11.49

= $ 960,261.38

Answer = **$
960,261.38**

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