Question

Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is considering the following project:

The project will last 5.00 years with an annual cash flow of $40.00 million. The project will require an initial investment of $140.00 million

The firm must determine the cost of capital to evaluate the project. (The project is within the firm’s normal activities)

Ramblin Wreck, Inc. Financial Data:

STOCK DATA:		BOND DATA:
Current Price Per Share	$28.00	Current Price Per Bond	$936.00
# of Shares	2.00 million	# of bonds	20,000.00
Book Value	$50 million	Annual Coupon Rate	9.00%
		Face Value Per Bond	$1,000
		Maturity	10 years

The risk free rate in the economy is currently 2.00%, while investors have a market risk premium of 6.00%. Ramblin Wreck, Inc. has a beta of 1.40. The tax rate is 40.00%.

What is the NPV of the project? (express in millions, so 1000000 would be 1.00)

Answer 1

	Statement Showing Computation Of PVCI					In Million $
		1	2	3	4	5
	Cash Flows	40.00	40.00	40.00	40.00	40.00
Less	Interest Costs	1.80	1.80	1.80	1.80	1.80		Interest Costs = 9%*1000$*20000/1000000
	EBT	38.20	38.20	38.20	38.20	38.20			1.8$ Million Per Annum
Less	Taxes(40%)	15.28	15.28	15.28	15.28	15.28
	CFAT	22.92	22.92	22.92	22.92	22.92		WACC = 9.267%
	Discount Factor(9.267%)	0.915	0.838	0.767	0.702	0.642
	Discouted Cash Flows	20.98	19.20	17.57	16.08	14.72
	PVCI	88.54	Million $
	Statement Showing PVCO				In Million $
	Year	0
	Cost of Equipment	140.00
	Discount Factor(9.267%)	1.000
	Discounted Cash Flows	140.00
	PVCO	140 Million $
	NPV =PVCI-PVCO
	NPV = -51.4634 Million $