Question

Georgia Movie Company has a capital structure with 45.00 % debt and 55.00% equity. The cost of debt for the firm is 9.00%, while the cost of equity is 14.00%. The tax rate facing the firm is 37.00%. The firm is considering opening a new theater chain in a local college town The project is expected to cost $ 12.00 million to initiate in year Georgia Movie expects cash flows in the first year to be $3.11 million, and it also expects cash flows from the movie operation to decrease by 2.00% each year going forward. The company wants to examine the project over a 14.00 -year period . What is the NPV of this project ?

Answer 1

Calculation of WACC
	Cost	Cost		Weight	Weighted cost
Debt	9%*(1-37%)	5.67%		45.00%	2.5515%
Equity	14%	14.00%		55.00%	7.7000%
		Total capital		Total WACC	10.2515%
Calculation of NPV
			10.25%
Year	Annual Cash flow	Annual Cash flow	PV factor, 1/(1+r)^time	Present values
0	$           (12,000,000)	$    (12,000,000)	1.0000	$ (12,000,000.00)
1	$               3,110,000	$        3,110,000	0.9070	$    2,820,823.30
2	=3110000*98%	$        3,047,800	0.8227	$    2,507,364.37
3	=3047800*98%	$        2,986,844	0.7462	$    2,228,738.01
4	=2986844*98%	$        2,927,107	0.6768	$    1,981,073.50
5	=2927107.12*98%	$        2,868,565	0.6139	$    1,760,930.26
6	=2868564.98*98%	$        2,811,194	0.5568	$    1,565,250.05
7	=2811193.68*98%	$        2,754,970	0.5050	$    1,391,314.45
8	=2754969.8*98%	$        2,699,870	0.4581	$    1,236,707.13
9	=2699870.41*98%	$        2,645,873	0.4155	$    1,099,280.27
10	=2645873*98%	$        2,592,956	0.3768	$        977,124.72
11	=2592955.54*98%	$        2,541,096	0.3418	$        868,543.49
12	=2541096.43*98%	$        2,490,275	0.3100	$        772,028.16
13	=2490274.5*98%	$        2,440,469	0.2812	$        686,237.91
14	=2440469.01*98%	$        2,391,660	0.2550	$        609,980.96
		Net Present Value	$    8,505,396.58