Question

Alpha Industries is considering a project with an initial cost of $8.4 million. The project will...

Alpha Industries is considering a project with an initial cost of $8.4 million. The project will produce cash inflows of $1.64 million per year for 8 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.73 percent and a cost of equity of 11.35 percent. The debt–equity ratio is .64 and the tax rate is 39 percent. What is the net present value of the project?

Homework Answers

Answer #1

After-tax cost of debt=5.73*(1-tax rate)

=5.73*(1-0.39)=3.4953%

Debt-equity ratio=debt/equity

Hence debt=0.64 equity

Let equity be $x

Debt=$0.64x

Total=$1.64x

WACC=Respective costs*Respective weight

=(x/1.64x*11.35)+(0.64x/1.64x*3.4953)

=8.28475122%

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=1.64[1-(1.0828475122)^-8]/0.0828475122

=$1.64*5.685056762

=$9.32 million

NPV=Present value of inflows-Present value of outflows

=$9.32 million-$8.4 million

=$0.92 million(or $923,493.09 approx).

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Alpha Industries is considering a project with an initial cost of $8.4 million. The project will...
Alpha Industries is considering a project with an initial cost of $8.4 million. The project will produce cash inflows of $1.56 million per year for 8 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.49 percent and a cost of equity of 11.19 percent. The debt–equity ratio is .56 and the tax rate is 40 percent. What is the net present value of the project? $400,549 $445,055 $462,857 $188,348...
Alpha Industries is considering a project with an initial cost of $7.5 million. The project will...
Alpha Industries is considering a project with an initial cost of $7.5 million. The project will produce cash inflows of $1.55 million per year for 7 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.46 percent and a cost of equity of 11.17 percent. The debt–equity ratio is .55 and the tax rate is 39 percent. What is the net present value of the project? $263,559 $482,364 $463,811 $397,552...
Alpha Industries is considering a project with an initial cost of $9.7 million. The project will...
Alpha Industries is considering a project with an initial cost of $9.7 million. The project will produce cash inflows of $1.67 million per year for 9 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 6.12 percent and a cost of equity of 11.61 percent. The debt–equity ratio is .77 and the tax rate is 40 percent. What is the net present value of the project?
Alpha Industries is considering a project with an initial cost of $9.1 million. The project will...
Alpha Industries is considering a project with an initial cost of $9.1 million. The project will produce cash inflows of $2.13 million per year for 6 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 6.15 percent and a cost of equity of 11.63 percent. The debt–equity ratio is .78 and the tax rate is 35 percent. What is the net present value of the project?
Alpha Industries is considering a project with an initial cost of $7.7 million. The project will...
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...
Alpha Industries is considering a project with an initial cost of $7.7 million. The project will...
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? A) $346,351 B) $497,319...
Antonio's is analyzing a project with an initial cost of $31,000 and cash inflows of $27,000...
Antonio's is analyzing a project with an initial cost of $31,000 and cash inflows of $27,000 a year for 2 years. This project is an extension of the firm's current operations and thus is equally as risky as the current firm. The firm uses only debt and common stock to finance their operations and maintains a debt-equity ratio of 0.5. The pre-tax cost of debt is 9.6 percent and the cost of equity is 12.3 percent. The tax rate is...
Joshua Industries is considering a new project with revenue of $478,000 for the indefinite future. Cash...
Joshua Industries is considering a new project with revenue of $478,000 for the indefinite future. Cash costs are 68 percent of the revenue. The initial cost of the investment is $685,000. The tax rate is 21 percent and the unlevered cost of equity is 14.2 percent. The firm is financing $200,000 of the project cost with debt. What is the adjusted present value of the project?
Panelli's is analyzing a project with an initial cost of $110,000 and cash inflows of $65,000...
Panelli's is analyzing a project with an initial cost of $110,000 and cash inflows of $65,000 in year 1 and $74,000 in year 2. This project is an extension of the firm's current operations and thus is equally as risky as the current firm. The firm uses only debt and common stock to finance its operations and maintains a debt-equity ratio of .45. The aftertax cost of debt is 4.8 percent, the cost of equity is 12.7 percent, and the...
Corner Restaurant is considering a project with an initial cost of $211,600. The project will not...
Corner Restaurant is considering a project with an initial cost of $211,600. The project will not produce any cash flows for the first three years. Starting in Year 4, the project will produce cash inflows of $151,000 a year for five years. This project is risky, so the firm has assigned it a discount rate of 18.6 percent. What is the project's net present value? A) -$46,028.92 B) $39,487.15 C) -$38,399.55 D) $67,653.02 E) $18,715.97