Question

# Dyrdek Enterprises has equity with a market value of \$11.8 million and the market value of...

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

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

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