Burns and nuble is considering an investment in a project which require an initi

Question

Burns and nuble is considering an investment in a project which require an initial outlay of $320,000 and produce expected cash flows in years 1-5 of $87,385 per year. You have determined that the current after tax cost of the firms capital required rate for each source of financing is as follows:

Cost of long term debt 8%
cost of preferred stock12%
cost of common stock 16%

Long term debt currently makes up 20% of the capital structure preferred stock 10%. And common stock 70% what is the net present value of this project?

A. -$13,876
B. -$20,000
c. $ 0
D. $287,692
E. $1,568

Explanation / Answer

The discount factor will be .2*.08 +.1*.12+.7* .16= .14 So we have (320,000)+ 87,385/(1.14) +87,385/1.14^2+.....+87,385/1.14^5= (20,000) B)

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