Panelli\'s is analyzing a project with an initial cost of $110,000 and cash infl

Question

Panelli's is analyzing a project with an initial cost of $110,000 and cash inflows of $65,000 in year one and $74,000 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 0.45. The after-tax cost of debt is 4.8 percent, the cost of equity is 12.7 percent, and the tax rate is 35 percent. What is the projected net present value of this project?

SHOW ME THE WORK OR NO POINTS!

Explanation / Answer

Hi,

Please find the answer as follows:

Cost of Capital = (.45/1.45)*4.8 + 12.7*(1/1.45) = 10.25%

NPV = -110000 + 65000/(1+.1025)^1 + 74000/(1+.1025)^2 = 9840 (after rounding off)

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.