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Your firm has an average-risk project under consideration. You choose to fund the project in the...

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 9.50%, the cost of preferred stock is 10.00%, the cost of common stock is 12.00%, and the WACC adjusted for taxes is 11.50%, what is the project’s NPV given the expected cash flows listed here?

Category
T0		 T1 T2 T3
Investment
 −$800,000
Net working capital −$ 50,000
 $ 50,000
Operating cash flow $350,000 $350,000 $350,000
Salvage
 $ 20,000
Total incremental cash flow −$850,000 $350,000 $350,000 $420,000

a. $1,150,904

b. $898,415

c. $300,904

d. $48,415

PLEASE SHOW WORK

Solutions

Expert Solution

Category T0 T1 T2 T3
Investment -800000.00
Net working capital -50000.00 $50,000
Operating cash flow $350,000 $350,000 $350,000
Salvage $20,000
A Total incremental cash flow -850000.00 $350,000 $350,000 $420,000
B PVIF @ 11.5%                1.0000          0.8969          0.8044          0.7214
C=A*B Present value           (850,000)        313,901        281,526        302,987          48,415
therefore NPV =               48,415
Ans = Option d 48415

jeff jeffy answered 9 months ago
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