Question

Dyrdek Enterprises has equity with a market value of $11.8 million and the market value of debt is $4.05 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 2.1 percent. The new project will cost $2.40 million today and provide annual cash flows of $626,000 for the next 6 years. The company's cost of equity is 11.47 percent and the pretax cost of debt is 4.98 percent. The tax rate is 35 percent. What is the project's NPV?  $377,779  $213,119  $180,192  $212,843  $559,481

Answer 1

Cost of equity = 11.47%

After cost of debt = 4.98%(1-0.35)

=4.98%(0.65)

=3.237%

Statement showing WACC

Source of capital	Market Value	Weight	K	WACC = Weight*K
Equity	11.8	74%	11.47%	8.54%
Debt	4.05	26%	3.24%	0.83%
Total	15.85			9.37%

Discount rate to be used = 9.37%+2.1% =11.47%

Statement Shaowing NPV

Particulars	0	1	2	3	4	5	6	Total
Cost of project	-2400000
Annual Cash flow		626000	626000	626000	626000	626000	626000
PVIF @ 11.47%	1.000	0.897	0.805	0.722	0.648	0.581	0.521
Present Value	-2400000	561586	503800	451960	405455	363734	326307	212843