Question

# CrochetCo is considering an investment in a project which would require an initial outlay of \$302774...

CrochetCo is considering an investment in a project which would require an initial outlay of \$302774 and produce expected cash flows in years 1 through 5 of \$89756 per year. You have determined that the current after-tax cost of the firm's capital (required rate of return) for each source of financing is as follows:

 Source of Capital Cost Weight Long-Term Debt 4% 59% Preferred Stock 10% 18% Common Stock 14% 23%

What is the net present value of this project?

 Calculation of firm's required rate of return Source of capital Cost Weight Cost*Weight Long term debt 4 0.59 2.36 Preferred stock 10 0.18 1.80 Common stock 14 0.23 3.22 Total 7.38 Firm's cost of capital= Weighted average 7.38% (See table) Calculation of NPV Year Cashflow (\$) Discounting factor @ 7.38% PV of cashflows (\$) 0 -302774 1 -302774.00 1 89756 0.931272118 83587.26 2 89756 0.867267757 77842.48 3 89756 0.807662281 72492.54 4 89756 0.752153363 67510.28 5 89756 0.700459455 62870.44 NPV 61529.00 We know, NPV= Present value of future cashflows from the project discounted at the required rate of return \$61,529 (rounded off to two decimal places)

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