Question

Mullen group is considering adding another division that requires a cash outlay of $30,000 and is expected to generate $7890 in after tax cash flows each year for the next five years. the company’s target capital structure is 40% debt, 15% preferred, and 45% common equity. the after tax cost of debt is 6% the cost of preferred is 7% and the cost of retained earnings is 12 %. the firm will not be issuing any new stock. what is the npv of this project

Answer 1

NPV :
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

WACC = Weighted Avg cost of Sources in capital structure.

Source	Weight	Cost	Wtd Cost
Debt	40%	6%	2.40%
Equity	45%	12%	5.40%
Preferred Stock	15%	7%	1.05%
WACC	8.85%

Year	CF	PVF @8.85%	Disc CF
0	$ -30,000.00	1.0000	$ -30,000.00
1	$    7,890.00	0.9187	$    7,248.51
2	$    7,890.00	0.8440	$    6,659.17
3	$    7,890.00	0.7754	$    6,117.75
4	$    7,890.00	0.7123	$    5,620.35
5	$    7,890.00	0.6544	$    5,163.39
NPV	$        809.17

Pls do rate, if the answer is correct and comment, if any further assistance is required.