Question

Dyrdek Enterprises has equity with a market value of $11.7 million and the market value of debt is $4.00 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 2.1 percent. The new project will cost $2.38 million today and provide annual cash flows of $621,000 for the next 6 years. The company's cost of equity is 11.43 percent and the pretax cost of debt is 4.97 percent. The tax rate is 40 percent. What is the project's NPV?

Answer 1

Computation of WACC

Source	Value in million	Weight	Post tax Rate	Weighted cost
Equity	$                         11.70	74.52%	11.43%	8.5179%
Debt	$                           4.00	25.48%	2.98% (4.97x.60)	0.7597%
	$                         15.70	100.00%		9.2776%

Additional Risk Adjusted Factor = 2.1%

Therefore, WACC for investment = 9.2776% + 2.1% =11.3776%  

Computation of NPV

Year	Cashflow	PV @11.3776%
0	$ -23,80,000.00	$ -23,80,000.00
1	$      6,21,000.00	$      5,57,562.74
2	$      6,21,000.00	$      5,00,605.81
3	$      6,21,000.00	$      4,49,467.23
4	$      6,21,000.00	$      4,03,552.63
5	$      6,21,000.00	$      3,62,328.36
6	$      6,21,000.00	$      3,25,315.28
Net Present Value	$     -8,72,364.21

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