Antonio\'s is analyzing a project with an initial cost of $38,000 and cash inflo

Question

Antonio's is analyzing a project with an initial cost of $38,000 and cash inflows of $29,000 a year for 2 years. 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 their operations and maintains a debt-equity ratio of 0.6. The pre-tax cost of debt is 11.0 percent and the cost of equity is 13.0 percent. The tax rate is 34 percent. What is the projected net present value of this project?

Explanation / Answer

WACC = Wd×Rd×(1-t)+We×Ke+Wp×Rp W is weights of respective portfolios R is return on respective portfolios Cost of equity 13.00% 13.00% After tax cost of debt 7.26% 0.11*(1-34%) Equity weight                                     0.63 1/1.6 Debt weight                                     0.38 0.6/1.6 WACC 10.85% Year Cash flow PVF@10.85% Present value 0 $   (38,000) 1.000 $         (38,000.00) 1 $      29,000 0.902 $           26,161.48 2 $      29,000 0.814 $           23,600.79 Net present value $           11,762.27

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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