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? (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)

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