Watertown Antiques has a pre-tax cost of debt of 8.7 percent and a cost of equit

Question

Watertown Antiques has a pre-tax cost of debt of 8.7 percent and a cost of equity of 13.2 percent. The firm uses the subjective approach to determine project discount rates. Currently, the firm is considering a project to which it has assigned an adjustment factor of 1.5 percent. The firm's tax rate is 35 percent and its debt-equity ratio is .6. The project has an initial cost of $5.2 million and produces cash inflows of $1.48 million a year for 5 years. What is the net present value of the project?

Explanation / Answer

((13.2-8.7)*1.5 - 35*0.6)(5.2+1.48) = 95.19/5 = 19million

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