Dyrdek Enterprises has equity with a market value of $11.7 million and the market value of...

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?

Expert Solution

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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