Question

Using the Weighted Average Cost of Capital in a Budgeting Decision

10) Your firm has an average-risk project under consideration. You choose to fund the project in the same manner as the firm's existing capital structure. If the cost of debt is 8.00%, the cost of preferred stock is 11.00%, the cost of common stock is 14.00%, and the WACC adjusted for taxes is 13.00%, what is the NPV of the project, given the expected cash flows listed here?

Category	T0	T1	T2	T3
Investment	-$2,000,000
NWC	-$250,000			$250,000
Operating Cash Flow		$850,000	$850,000	$850,000
Salvage				$50,000
Total Incremental Cash Flow	-$2,250,000	$850,000	$850,000	$1,150,000

A) -$74,121

B) $-35,105

C) $2,214,895

D) $2,479,604

PLEASE SHOW WORK

Answer 1

	Category	T0	T1	T2	T3
	Investment	($2,000,000)
	NWC	($250,000)			$250,000
	Operating Cash Flow		$850,000	$850,000	$850,000
	Salvage				$50,000
A	Total Incremental Cash Flow	($2,250,000)	$850,000	$850,000	$1,150,000
B	PVIF @ 13%	1.0000	0.8850	0.7831	0.6931
C=A*B	Present value	(2,250,000)	752,212	665,675	797,008	(35,105)
	therefore NPV =	(35,105)
	Ans = Option B	-35105