Question

Dyrdek Enterprises has equity with a market value of $12.3 million and the market value of debt is $4.30 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 1.6 percent. The new project will cost $2.50 million today and provide annual cash flows of $651,000 for the next 6 years. The company's cost of equity is 11.67 percent and the pretax cost of debt is 5.03 percent. The tax rate is 40 percent. What is the project's NPV?

• $352,279

• $201,730

• $491,655

• $222,921

• $189,307

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A B C D E F G Tax rate 40% Capital Equity Debt Market value $12,300,000.00 $4,300,000.00 $16,600,000.00 Weight 74.10% 25.90% Cost 11.67% 5.03% Post tax Cost 11.67% 3.02% WACC Risk adjustment factor 9.43% 1.60% 12 MARR for Project 11.03% Initial Cost of Project Annual cash inflows Project life in years $2,500,000 $651,000 NPV of Project $251,795

Cell reference -

ДА в с DE 2 Tax rate 0.4 4 Capital l Equity Debt Market value 12300000 4300000 =SUM(C5:C6) Weight =C5/$C$ 7 =C6/$C$7 0 Cost .1167 0.0503 Post tax Cost =E5 =E6*(1-C2) WACC Risk adjustment factor =SUMPRODUCT(D5:06,F5:F6) 0.016 MARR for Project =C9+C10 Initial Cost of Project Annual cash inflows Project life in years 2500000 651000 NPV of Project =PV(C12,C16,-C15,,0)-C14

Please note: None of the above options are correct. The Correct NPV of this project is $251,795.

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.