Answered

Discover answers to your most pressing questions at Westonci.ca, the ultimate Q&A platform that connects you with expert solutions. Discover in-depth solutions to your questions from a wide range of experts on our user-friendly Q&A platform. Get precise and detailed answers to your questions from a knowledgeable community of experts on our Q&A platform.

Alpha Industries is considering a project with an initial cost of $8.8 million. The project will produce cash inflows of $1.68 million per year for 8 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.85 percent and a cost of equity of 11.43 percent. The debt–equity ratio is .68 and the tax rate is 40 percent. What is the net present value of the project?

Sagot :

Tundexi

Answer:

Explanation:

After tax cost of debt = 5.85%*(1 - Tax rate)

After tax cost of debt = 5.85%*(1 - 0.4)

After tax cost of debt = 3.51%

Debt-equity ratio = Debt/Equity

Hence, debt = 0.68equity. Let equity be $x. Debt = $0.68x

Total = $1.68x

WACC = Respective costs * Respective weights

WACC = (x/1.68x*11.43%) + (0.68x/1.68x*3.51%)

WACC = 8.224285714%

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

= $1.68*[1-(1.08224285714)^-8]/0.08224285714

= $1.68*5.698047502

= $9.572719803 million

NPV = Present value of inflows - Present value of outflows

= $9.572719803 million - $8.8 million

= $772,720

We hope this information was helpful. Feel free to return anytime for more answers to your questions and concerns. Thank you for your visit. We're dedicated to helping you find the information you need, whenever you need it. Keep exploring Westonci.ca for more insightful answers to your questions. We're here to help.