Panelli\'s is analyzing a project with an initial cost of $110,000 and cash infl
ID: 2654479 • Letter: P
Question
Panelli's is analyzing a project with an initial cost of $110,000 and cash inflows of $68,000 in year one and $70,000 in year two. This project is an extension of the firm's current operations and thus is equally as risky as the current firm. The firm uses only debt and common stock to finance its operations and maintains a debt-equity ratio of 1.25. The aftertax cost of debt is 8.8 percent, the cost of equity is 14 percent, and the tax rate is 35 percent. What is the projected net present value of this project?
Explanation / Answer
$7,901.75 Statement showing calculation of NPV Particulars Time PVF@11.11% Amount PV(Amount *PVF) Cash Outflows(Invt in project) - 1.0000 (110,000.000) (110,000.00) PV of Cash Outflows (110,000.00) Cash Inflows 1.000 0.900 68,000.000 61,200.61 Cash Inflows 2.000 0.810 70,000.000 56,701.13 PV of Cash Inflows 117,901.75 NPV 7,901.75 Time PVF@11.11% Working Notes 1.00 0.900 1/1.1111 2.00 0.810 .900/1.1111 Debt Equity Ratio = 1.25 Debt/Equity = 1.25 Debt = 1.25 Equity Debt + Equity =110000 1.25 Equity + Equity = 110000 Equity = 48,889 Debt =1.25*48889 = 61,111 Statement showing computation of WACC Particulars Amount Weight Cost of Capital Weighted Cost of capital Equity or common stock 48,889.00 0.4444 14.000% 6.22% Debt 61,111.00 0.5556 8.80% 4.89% 110,000.00 1.0000 11.11% Thus WACC is 11.11% Note: Since nothing is specified we have asumed cash inflows given in the question are net of tax
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.