Travis & Sons has a capital structure which is based on 45 percent debt, and 55

Question

Travis & Sons has a capital structure which is based on 45 percent debt, and 55 percent common stock. The pre-tax cost of debt is 7.5 percent, and the cost of common stock is 13 percent. The company's tax rate is 39 percent. The company is considering a project that is equally as risky as the overall firm. This project has initial costs of $325,000 and annual cash inflows of $87,000, $279,000, and $116,000 over the next three years, respectively. What is the projected net present value of this project?

Explanation / Answer

Hi,

Please find the answer as follows:

First Calculate WACC = Weight of Debt*After Tax Cost of Debt + Weight of Equity*Cost of Equity

WACC =.45*7.5*(1-.39) + .55*13 = 9.20875 or 9.21%

NPV = -325000 + 87000/(1+.0921)^1 + 279000/(1+.0921)^2 + 116000/(1+.0921)^3 = 77647.07

NPV would be = 77647.07

Thanks.

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