Question
In: Finance
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 |
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