connect. FINANCE Hunter Casselberry FINA 6341 fall 2017: fall 2017 A chap 18 hw
ID: 2790419 • Letter: C
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connect. FINANCE Hunter Casselberry FINA 6341 fall 2017: fall 2017 A chap 18 hw instructions I help Question 3 (of 6) a Save & Exit Submit 3. 10.00 points Watson, Inc, is an all-equity firm. The cost of the company's equity is currently 12 percent, and the risk-free is 5.2 percent. The company is currently considering a project that will cost $11.91 million and lasts years. The company uses straight-line depreciation. The project will generate revenues minus expen each year in the amount of $3.37 million. If the company has a tax rate of 40 percent, what is the net present value of the project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net present value References eBook & Resources Worksheet Dimculity: 1 Basic Section: 18.1 Adjusted Present Value Approach Check my workExplanation / Answer
Cost of Equity
12%
Risk Free Rate
5.20%
Cost of the Project
$ 1,19,10,000
Life
6 Years
Depreciation
$ 19,85,000
Tax Rate
40%
Calculation of NPV:
Revenue-Exp
$ 33,70,000
Less: Dep
$ 19,85,000
Profit Before Tax
$ 13,85,000
Less:Tax@40%
$ 5,54,000
Profit After Tax
$ 8,31,000
Cash Flows After Tax
$ 28,16,000
PVIAF@12%
4.11
PV of Cash in flows
$ 1,15,73,760
Less: Cost of Project
$ 1,19,10,000
NPV
$ -3,36,240
Note: the cost of equity given is considered as post tax cost of equity. However, if it is considered as pre tax cost of equity then the PVIAF@7.2% would be 4.74 and the NPV comes to $ 14,37,840
Cost of Equity
12%
Risk Free Rate
5.20%
Cost of the Project
$ 1,19,10,000
Life
6 Years
Depreciation
$ 19,85,000
Tax Rate
40%
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