Question

Chapter 18 Assignment Check my work 33 Walker, Inc., is an all-equity firm. The cost of the company's equity is currently 111 percent and the risk-free rate is 4 percent. The company is currently considering a project that will cost $11.82 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.47 million. 10 poirts If the company has a tax rate of 24 percent, what is the net present value of the project? (Do not round Intermediate calculations and enter your answer In dollars, not millons of dollers, rounded to 2 decimal places, e.g, 1,234,567.89) ebook 1.200.157 42 Net present value Prnt Reterences <Prog Nexd O Type here to search esc I0 40 # $ % 7 2 & 4

Answer 1

Solution:

Annual cash inflow = (Net generated inflows - Annual Depreciation)*(1-tax) + Annual Dep.

   = ($3.47 - 11.82/ 6 )*(1-0.24) + $11.82 /6

   = $1.14 + $1.97 = $3.11 million

So, Net present value = Net Annual inflows* sum of factors from 1 to 6 years at 11.1% - initial outlays

   = $3.11 * [1-(1+0.111)^-6 / 0.111 ] - $11.82 million

   = $3.11million * 4.218379 - $11.82 million

   = $1.29915742 million

   = or $1,299,157.42 (Rounded off)