[Q18Q23] You are evaluating a 1year project that is in line with the firm’s existing business. Specifically, this new project requires an investment of $1,200 in free cash flow today, but will generate $1,600 one year from today. The project will be partially financed with a 1year maturity debt whose face value is $200 and interest rate is 10%.
Suppose that you estimated the cost of equity as 20%, based on the firm’s stock data. However, you were not able to estimate the cost of debt because your firm’s total debt consists of longterm debt, shortterm debt, investment grade debt, and debt with different levels of collateral. Assume that the corporate tax rate is 30%.
Under the FTE approach, the NPV of the project is obtained by discounting future FCFE using the _______.
A. 
Cost of assets 

B. 
Cost of unlevered equity 

C. 
Weighted average cost of capital 

D. 
Cost of levered equity 
What is the NPV of this project?
A. 
$21 

B. 
$14 

C. 
$80 

D. 
$155 
Under the FTE approach, the NPV of the project is obtained by discounting future FCFE using the _______.
here we have Free Cash Flow from equity, as the cash flow is from equity, we have to use Cost of equity to value of company's equity. Now there are two Cost of equities: Levered and Unlevered. we use Levered cost of equity because the company has long term debt in their capital structure.
Thus Cost of Levered Equity
2. NPV of project = (Cash Inflow in Year 1  Debt  Interest * (1  Tax)] / (1 + Cost of equity)  Cash Outflow
NPV of project = (1600  200  20 * (1  0.30)] / (1 + 0.20)  1000
NPV of project = 1155  1000
NPV of project = $155 Option D
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