Question

Dorman Industries has a new project available that requires an initial investment of $5.8 million. The project will provide unlevered cash flows of $805,000 per year for the next 20 years. The company will finance the project with a debt-to-value ratio of .4. The company’s bonds have a YTM of 6.8 percent. The companies with operations comparable to this project have unlevered betas of 1.28, 1.21, 1.43, and 1.38. The risk-free rate is 3.8 percent, and the market risk premium is 7 percent. The company has a tax rate of 40 percent. What is the NPV of this project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $

Answer 1

А C D E Cost% 16.79% =3.8%+B13*7% Market value $ 60 WACC (Cost Weights %*Weights) 0.6000 10.07% 2 Common stock 3 4 5 Debt (After tax cost) $ 40 0.4000 1.63% 4.08% =6.8%*(1-40%) Total $ 100 1.0000 WACC 11.70% 11 12 Average unlevered beta 13 Levered Beta 1.325 =(1.28+1.21+1.43+1.38)/4 1.86 =(1+(1-40%)*(40/60))* B12

PVIF Year Cash flow 0 $(5,800,000) 1 $ 805,000 2 $ 805,000 3 $ 805,000 41 $ 805,000 5 $ 805,000 6 $ 805,000 11.7% 1.000 $ 0.895 $ 0.801 $ 0.717 $ 0.642 $ 0.575 $ 0.515 $ Present value -5,800,000.00 720,661.04 645,158.18 577,565.67 517,054.75 462,883.49 414,387.70 7 $ 8 $ 9 $ 10 $ 11 $ 12 $ 13 $ 14 $ 15 $ 16 $ 17 $ 18 $ 19 $ 20 $ 805,000 805,000 805,000 805,000 805,000 805,000 805,000 805,000 805,000 805,000 805,000 805,000 805,000 805,000 0.461 $ 0.413 $ 0.369 $ 0.331 $ 0.296 $ 0.265 $ 0.237 $ 0.212 $ 0.190 $ 0.170 $ 0.152 $ 0.136 $ 0.122 $ 0.109 s 370,972.76 332,106.35 297,311.94 266,162.89 238,277.30 213,313.25 190,964.66 170,957.50 153,046.47 137,011.96 122,657.37 109,806.69 98,302.37 88,003.34 NPV $ 326,605.69

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