Question

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?

Answer 1

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)