Company A is considering a project that will cost $60 million and have a year-en

Question

Company A is considering a project that will cost $60 million and have a year-end after-tax cash flow of $5 million in perpetuity. The before tax cost of debt is 8% and its unlevered cost of equity is 10%. The project has risk similar to that of the operation of the firm, and the target debt-equity ratio is 1.2. What is the NPV for the project if the tax rate is 35%?

A. $3,533,581.43

B. -$16,747,404.84

C. $1,804,697.16

D. $7,750,677.51

E. $7,732,359.21

The correct answer is letter C but I keep getting letter D.

Please show a step-by-step explanation to the calculation.

Explanation / Answer

Part - 1

Calculation of WACC

WACC =7.3821%

Total Cash Inflow = Cash Inflow /WACC

=5,000,000/0.073821

=67,731,404

Net Present Value = Discounted Cash Inflow - Discounted Outflow

=67,731,404-60,000,000

=7,731,404

Particulars Proportion % WACC Equity 0.4545(1/2.20) 10% 4.5455 Debt 0.5455(1.20/2.20) 5.20%(8*0.65(1-0.35)) 2.8366 WACC 7.3821

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