Homework Answers
| 1) | Cost of equity = 3.1%+1.82*7.8% = | 17.30% | |||
| After tax cost of debt = 8.6%*(1-40%) = | 5.16% | ||||
| 2) | WACC: | ||||
| Component | Market Value $ | Weight | Component Cost | WACC | |
| Equity (80500*$28) | 2254000 | 44.42% | 17.30% | 7.68% | |
| Debt (30000*$94) | 2820000 | 55.58% | 5.16% | 2.87% | |
| Total | 5074000 | 10.55% | |||
| WACC = 10.55% | |||||
| 3) | PROJECT A: | ||||
| Year | Cash Flows | PVIF at 10.55% | PV at 10.55% | ||
| 1 | 2660060 | 0.90457 | 2406205 | ||
| 2 | 2727060 | 0.81824 | 2231399 | ||
| 3 | 2873520 | 0.74016 | 2126855 | ||
| 4 | 3773400 | 0.66952 | 2526375 | ||
| PV of cash inflows = | 9290835 | ||||
| PROJECT B: | |||||
| Year | Cash Flows | PVIF at 10.55% | PV at 10.55% | ||
| 1 | 4225010 | 0.90457 | 3821809 | ||
| 2 | 2540306 | 0.81824 | 2078589 | ||
| 3 | 1567820 | 0.74016 | 1160433 | ||
| 4 | 1205446 | 0.66952 | 807073 | ||
| PV of cash inflows = | 7867903 | ||||
| 4) | As both the projects have the same initial investment, the project with the higher | ||||
| PV of cash inflows is to be selected, as it will have the higher NPV. This is of course | |||||
| subject to the condition that the NPVs should be positive. | |||||
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