After tax cost of debt = 7.5%*(1-40%) = 4.5%
Cost of equity = Rf+beta*(Rm-Rf)
= 4%+1.75*(12%-4%)
= 18%
WACC = cost of debt* debt/(debt plus equity)+ the cost of equity* equity/(the debt plus equity)
= 4.5%*2/5+18%*3/5
= 12.6%
NPV = Initial cost +PV of annuity
= -50+8*(1-1/(1+12.6%)^10)/12.6%
=-50+44.11
= - $5.89 million
The project should not be undertaken since NPV is negative.
Speedy Computers, Inc. is considering a new project that costs $50 million. The project will generate...
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