Question

13. Your company is considering a project that will cost $580,000. The project will generate after- pon fax cash flows of $179,000 per year for 5 years. The firm's WACC is 12% and its target D/E ratio is 1.5. The flotation cost for equity is 8% and the flotation cost for debt is 4%. What is! the NPV of the project after adjusting for flotation costs? A) $68,332 B) $30,848 C) $75,015 D) $135,495 E) $70,787 I get 23, 737 ? Page 4 of 8

PLEASE SHOW ALL CALCULATIONS BEING DONE (not in a chart preferably) thank you :) appreciate it.

Answer 1

Weight of Debt = Debt/(Debt+Equity) = 1.5/(1+1.5) = 0.6

Weight of Equity = 1- weight of Debt = 0.4

Weighted average floatation cost = 0.6* 0.04 + 0.4*0.08 = 0.056

Total Amount raised = Amount required / (1-weighted average floatation cost)

= 580000/ (1-0.056)

=$614406.78

So,

NPV = -614406.78 + 179000/1.12 + 179000/1.12^2 + ... + 179000/1.12^5

= -614406.78 + 179000/0.12*(1-1/1.12^5)

=$30848.16

So, option B is correct