The Bakery is considering a new project it considers to be a little riskier than
ID: 2781280 • Letter: T
Question
The Bakery is considering a new project it considers to be a little riskier than its current operations. Thus, management has decided to add an additional 1.5% to the company's overall cost of capital when evaluating this project. The project has an initial cash outlay of $62,000 and projected cash inflows of $17,000 in year one, $28,000 in year two, and $30,000 in year three. The firm uses 25% debt and 75% common stock as its capital structure. The company's cost of equity is 15.55 while the after-tax cost of debt for the firm is 6.1%.
a. What is the WACC for the firm? b. What is the WACC for the project? c. What is the projected net present value of the new project?
Explanation / Answer
a) WACC of the firm = 0.25*6.1 + 0.75*15.55 = 13.1875
b) WACC of the project = 13.1875 + 1.5 = 14.6875%
NPV = -6,002.38
14.69% Cash flows Year Discounted CF (62,000.00) 0 -62000.00 17,000.00 1 14822.89 28,000.00 2 21287.56 30,000.00 3 19887.17Related Questions
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