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Waterdeep Adventure Travel has an unlevered cost of equity of 19.5%, and a cost of debt...

Waterdeep Adventure Travel has an unlevered cost of equity of 19.5%, and a cost of debt of 6.1%. Their tax rate is 36%, and they maintain a capital structure of 58% debt and the rest equity. They are considering giving cave exploration tours to their menu of adventure vacations. Buying the needed equipment would cost $50,902, and would bring in $34,127 one year from today, and $86,583 two years from today. What is the NPV of this project, using the WACC method, if they invest today?

Please give your answer to the nearest dollar.

Solutions

Expert Solution

Cost of Equity 19.50%
Cost of Debt 6.10%
Tax Rate 36%
Weight of Debt 58%
Weight of Equity 42%
Cost of Equity * Weight of Equity + Cost of Debt (after Tax)*Weight of Debt
10.45%
Equipment Cost $50,902
a Discounted Factor     b Discounted Value    a*b
Cash Flow in Year 1 $34,127 0.905387 $30,898.14
Cash Flow in Year 2 $86,583 0.819726 $70,974.31
Total $101,872.46
NPV =sum of all discounted Cash Flows - Initial Investment
$50,970.46
$50,970

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