Question

A company has a proposed 2-year project with the cash flows shown below and would like to calculate the NPV of this project so that they can decide whether to pursue the project or not. The company has a target capital structure of 60% equity and 40% debt. The beta for this firms stock is 1.6, the risk-free rate is 4.5, and the expected market risk premium is 6%. The bonds for this company pay interest semiannually and have a coupon interest rate of 9%, 17 years to maturity, a face value of $1,000, and a current price of 945.42. If the corporate tax rate is 30%, what is the NPV of the proposed project for this firm? (Answer to the nearest dollar, but do not use a dollar sign).

Years Cash Flows

0 -4,000

1 1,000

2 3,000

Answer 1

	Amount	weight	cost	weight*cost
equity	60.00	0.6000	14.1000%	0.0846
debt	40.00	0.4000	6.7620%	0.0270

WACC = 11.1648%

Discount rate	11.1648%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(4,000.000)	0	(4,000.00)	(4,000.00)
1,000.000	1	899.57	(3,100.43)
3,000.000	2	2,427.65	(672.78)

NPV = -672.78

Cost of equity = risk free rate + beta* market risk premium

cost of debt = =RATE(34,45,-945.42,1000,0)*2*0.7 (copy paste this in Excel)