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Bob's Taco Shop is considering a two-year project with an initial cost of $102,000 and cash...

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

Solutions

Expert Solution

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

jeff jeffy answered 1 year ago
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