Question

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.

Answer 1

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