Question

Dyrdek Enterprises has equity with a market value of $10.5 million and the market value of debt is $3.40 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 1.3 percent. The new project will cost $2.14 million today and provide annual cash flows of $561,000 for the next 6 years. The company's cost of equity is 10.95 percent and the pretax cost of debt is 4.85 percent. The tax rate is 40 percent. What is the project's NPV?

Answer 1

Before tax cost of debt 4.85% after tax cost of debt [4.85% x 0.60 ] 2.91% After tax WACC Particulars weight weighted cost cost Debt 2.91% 0.2446 0.0071 10.95% common stock 0.7554 0.0827 WA 8.98% WACC +1.3% = 10.28% Appropriate discount rate cash flows 10.28% Year present value pv -$2,140,000 $561,000 $561,000 $561,000 $561,000 -$2,140,000.00 0 1 $508,689.52 1 0.90675 $461,256.73 2 0.82220 $418,246.81 3 0.74554 $379,247.36 $343,884.42 0.67602 $561,000 $561,000 5 0.61298 $311,818.89 6 0.55583 $283,143.73 NPV