20. WACC and NPV 1103, 5] Scanlin, Inc., is considering a project that will resu
ID: 2651192 • Letter: 2
Question
20. WACC and NPV 1103, 5] Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $2.1 million at the end of the first year, and these savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debt?equity ratio of .130, a cost of equity of 11 percent, and an aftertax cost of debt of 4.6 percent The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjust-ment factor of 3 percent to the cost of capital for such risky projects. Under what circumstances should the company take on the project?Explanation / Answer
Debt/Equity= .8
Debt=.8 Equity
Debt+Equity=1
.8 Equity+Equity=1
Equity=1/1.8=.55
Debt=1-.55=.45
WACC= Equity/Total*c0st of Equity+Debt/Total*Cost of debt
WACC= .55/1*11+.45*4.6
WACC= 13.62
Cost= 13.62+3=16.62%
NPV= Cash inflow/ke-g
=2100000/.1662-.02
=2100000/.1462=14363885
The project should be accepted
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