Ajax currently has 20% debt and 80% equity. Their weighted average cost of capit

Question

Ajax currently has 20% debt and 80% equity. Their weighted average cost of capital is 12%, and the cost of debt is 4%. The tax rate is 40%. The firm is considering a new project. The initial investment is $150,000,000, and the project will generate sales of $80M per year for 8 years. The investment can be depreciated straight-line for 8 years to a zero book value. There are no working capital requirements. Operating expenses (not including depreciation or interest) are $42M per year for 8 years. They plan to fund the project using the proportions listed above and the debt

Explanation / Answer

Flow to Equity (FCFE) = Net Income

- (Capital Expenditures - Depreciation)

- (Change in Non-cash Working Capital)

+ (New Debt Issued - Debt Repayments)

Depreciation = 150,000,000/8 =$18,750,000

WACC = 12%

FCFE =(80-42-18.75)*(1-40%) + 18.75 =$30.3

value of the project = -150 + 30.3/1.12 + 30.3/1.12^2 .......+30.3/1.12^8 = $5,19,484.94

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