Alpha Industries is considering a project with an initial cost of $7.7 million. The project will produce cash inflows of $1.35 million per year for 9 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.52 percent and a cost of equity of 11.21 percent. The debt–equity ratio is .57 and the tax rate is 35 percent. What is the net present value of the project?
Multiple Choice
$522,185
$346,351
$497,319
$580,205
$603,414
After-tax cost of debt=5.52*(1-tax rate)
=5.52*(1-0.35)=3.588%
Debt-equity ratio=debt/equity
Hence debt=0.57 equity
Let equity be $x
Debt=$0.57 x
Total=$1.57x
WACC=Respective costs*Respective weight
=(x/1.57x*11.21)+(0.57x/1.57x*3.588)
=8.44277707%
Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$1.35[1-(1.0844277707)^-9]/0.0844277707
=$1.35*6.133485512
=$8,280,205.44
NPV=Present value of inflows-Present value of outflows
=$8,280,205.44-$7,700,000
=$580205(Approx).
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