In: Finance
Bob's Taco Shop is considering a two-year project with an initial cost of $102,000 and cash inflows of $65,000 in year one and $74,000 in year two.
The firm's debt-equity ratio is 0.45 and the after-tax cost of debt is 4.8 percent. You estimate that the cost of equity is 12.7 percent, and the tax rate is 35 percent. Calculate the net present value of this project using the firm's WACC.
$16,938
$15,411
$16,333
$17,840
$15,809
Computation of WACC | |||||
Debt/equity = | 0.45 | ||||
thereore Debt / Total asset = | 31.03% | ||||
equity / total asset = | 68.97% | ||||
after tax cost of debt = | 4.80% | ||||
Cost of equity = | 12.70% | ||||
WACC | |||||
Source | weight | cost of capital | weight * cost | ||
debt | 31.03% | 4.80% | 1.49% | ||
equity | 68.97% | 12.70% | 8.76% | ||
WACC | 10.25% | ||||
Computation of NPV | |||||
i | ii | iii | iv=ii*iii | ||
year | Cashflow | PVIF @ 10.25% | present value | ||
0 | -102000 | 1.0000 | (102,000.00) | ||
1 | 65000 | 0.9070 | 58,957.84 | ||
2 | 74000 | 0.8227 | 60,881.89 | ||
NPV = | 17,840 | ||||
therefore correct answer is option = | $ 17,840 |