Bet-r-Bilt Company is considering a project with an initial cost of $7.4 million

Question

Bet-r-Bilt Company is considering a project with an initial cost of $7.4 million. The project will produce cash inflows of $1.54 million a year for seven years. The firm uses the subjective approach to assign discount rates to projects of +1.5% which needs to be added to the project WACC. The firm has a pretax cost of debt of 8.6% and a cost of equity of 13.7%. The debt-equity ratio is 0.65 and the tax rate is 35%. What is the NPV of the project? Decreasing the accounts payable turnover rate will increase the operating cycle. Business risk is the equity risk arising from the daily operations of the firm. The length of the credit period will tend to decrease given a decrease in consumer demand. Shortening the cash cycle is most likely going to increase the accounts receivable period.

Explanation / Answer

1) D/E = 0.65/1

D/A = D/(E+D) = .65/(1+.65) = 0.3939

E/A = 1-D/A = 0.6060

WACC = D/A*Cost of debt*(1-tax rate) + E/A*cost of equity

= 0.3939*8.6*(1-.65)+.6060*13.7 = 10.504%

Adjusted WACC= 9.487+1.5 = 12%

~372951

2) False : payables outstanding doesnot form a part of operating cycle.

3) True

4) False: Lesser demand will cause sellers to give a laxer credit terms

5) False: cash cycle can be reduced by decreasing the accounts receivables period

Cash cycle = receivables outstanding + days of inventory on hand - payables outstanding

WACC 12.000% Year 0 1 2 3 4 5 6 7 Cash flow stream -7.4 1.54 1.54 1.54 1.54 1.54 1.54 1.54 Discounting factor 1 1.12 1.2544 1.404928 1.573519 1.762342 1.973823 2.210681 Discounted cash flows project -7.4 1.375 1.227679 1.096142 0.978698 0.873837 0.780212 0.696618 Sum of discounted future cashflows = -0.37181493 =NPV Discounting factor = (1 + Required rate)^(CORRESPONDING PERIOD IN YEARS) Discounted Cashflow= Cash flow stream/discounting factor

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

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