Question

Consider the following project for Dawg Incorporated:

YEAR	0	1	2	3	4	5
Sales		$150,000	$150,000	$150,000	$150,000	$150,000
Cost of Goods		$70,000	$70,000	$70,000	$70,000	$70,000
S&A		$30,000	$30,000	$30,000	$30,000	$30,000
Depreciation		$30,000	$30,000	$30,000	$30,000	$30,000
Investment in NWC	$1,000	$500	$500	$500	$500	$500
Investment in Gross PPE	$150,000

The project will last 5 years and has the same risk as the typical Dawg Incorporated project.  The firm has a capital structure of 40.00% debt and 60.00% equity. The cost of debt is 8.00%, while the cost of equity is estimated at 15.00%. The tax rate facing the firm is 30.00%.  There is no reclaimed NWC or NSV at end of year 5.

What is the NPV for the project?

Answer 1

In order to calculate NPV first we have to find Weighted Average Cost of Capital

Cost of Equity = 15%

Cost of Debt = Interest *(1-Tax) = 8%*(1-30%) = 5.6%

Sources	Weights (A=X/Y)	Cost (B)	WACC (A*B)
Debt	0.40	5.6%	0.0224
Equity	0.60	15%	0.0900
Total (Y)	WACC (SUM OF (A*B))	0.1124

In first case i am taking Debt as in 40% 150,000$, hence interest would be 8% of it = 150000*40%*8% = 4,800$

Present Vale Factor = 1/(1+WACC)^Number of years to be bought back

Calculation of Net Present Value (In Dollars)
Particulars	0	1	2	3	4	5
Sales		150000	150000	150000	150000	150000
Less: Cost of Goods Sold		-70000	-70000	-70000	-70000	-70000
Less: Selling and Administration		-30000	-30000	-30000	-30000	-30000
Earnings Before Interest Tax and Depriciation		50000	50000	50000	50000	50000
Less: Depreciation		-30000	-30000	-30000	-30000	-30000
Earnings Before Interest and Tax		20000	20000	20000	20000	20000
Less: Interest (150000*40%*8%)		-4800	-4800	-4800	-4800	-4800
Earnings Before Tax		15200	15200	15200	15200	15200
Less: Tax Rate @30%		-4560	-4560	-4560	-4560	-4560
Profit After Tax		10640	10640	10640	10640	10640
Add: Interest *(1-Tax)		3360	3360	3360	3360	3360
Unlevered Income		14000	14000	14000	14000	14000
Add: Depreciation		30000	30000	30000	30000	30000
Net Operating Profit After Tax		44000	44000	44000	44000	44000
Less: Capital Investment	-150000
Less: Net Working Capital	-1000	-500	-500	-500	-500	-500
Free Cash Flow (A)	-151000	43500	43500	43500	43500	43500
Present Value Factor @ 11.24% (B)	1	0.89895721	0.80812406	0.726468954	0.653065	0.587077
Present Values (A*B)	-151000	39104.63862	35153.3968	31601.39951	28408.31	25537.85
Net Present Value (Sum of (A*B))	8805.592299

In Second case i am taking Debt as in 40% 151,000$(Capital Investment + Working Capital), hence interest would be 8% of it = 151000*40%*8% = 4,832$

Calculation of Net Present Value (In Dollars)
Particulars	0	1	2	3	4	5
Sales		150000	150000	150000	150000	150000
Less: Cost of Goods Sold		-70000	-70000	-70000	-70000	-70000
Less: Selling and Administration		-30000	-30000	-30000	-30000	-30000
Earnings Before Interest Tax and Depriciation		50000	50000	50000	50000	50000
Less: Depreciation		-30000	-30000	-30000	-30000	-30000
Earnings Before Interest and Tax		20000	20000	20000	20000	20000
Less: Interest (150000*40%*8%)		-4832	-4832	-4832	-4832	-4832
Earnings Before Tax		15168	15168	15168	15168	15168
Less: Tax Rate @30%		-4550.4	-4550.4	-4550.4	-4550.4	-4550.4
Profit After Tax		10617.6	10617.6	10617.6	10617.6	10617.6
Add: Interest *(1-Tax)		3382.4	3382.4	3382.4	3382.4	3382.4
Unlevered Income		14000	14000	14000	14000	14000
Add: Depreciation		30000	30000	30000	30000	30000
Net Operating Profit After Tax		44000	44000	44000	44000	44000
Less: Capital Investment	-150000
Less: Net Working Capital	-1000	-500	-500	-500	-500	-500
Free Cash Flow (A)	-151000	43500	43500	43500	43500	43500
Present Value Factor @ 11.24% (B)	Add a comment Know the answer? Add Answer to: Consider the following project for Dawg Incorporated: YEAR 0 1 2 3 4 5 Sales $150,000... Your Answer: Post as a guest Your Name: What's your source? Earn Coins Coins can be redeemed for fabulous gifts. Log In Sign Up Post as anonymous Post Your Answer Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free. Similar Homework Help Questions Consider the following project for Dawg Incorporated: YEAR 0 1 2 3 4 5 Sales $150,000... Consider the following project for Dawg Incorporated: YEAR 0 1 2 3 4 5 Sales $150,000 $150,000 $150,000 $150,000 $150,000 Cost of Goods $75,000 $75,000 $75,000 $75,000 $75,000 S&A $30,000 $30,000 $30,000 $30,000 $30,000 Depreciation $30,000 $30,000 $30,000 $30,000 $30,000 Investment in NWC $1,000 $500 $500 $500 $500 $5001 Investment in Gross PPE $150,000 The project will last 5 years and has the same risk as the typical Dawg Incorporated project. The firm has a capital structure of 40.00% debt... Consider the following project for Dawg Incorporated: YEAR 0 1 2 3 4 5 Sales $150,000... Consider the following project for Dawg Incorporated: YEAR 0 1 2 3 4 5 Sales $150,000 $150,000 $150,000 $150,000 $150,000 Cost of Goods $65,000 $65,000 $65,000 $65,000 $65,000 S&A $30,000 $30,000 $30,000 $30,000 $30,000 Depreciation $30,000 $30,000 $30,000 $30,000 $30,000 Investment in NWC $1,000 $500 $500 $500 $500 $500 Investment in Gross PPE $150,000 The project will last 5 years and has the same risk as the typical Dawg Incorporated project.  The firm has a capital structure of 30.00% debt and... Consider the following project for Dawg Incorporated: YEAR 0 1 2 3 4 5 Sales $150,000... Consider the following project for Dawg Incorporated: YEAR 0 1 2 3 4 5 Sales $150,000 $150,000 $150,000 $150,000 $150,000 Cost of Goods $65,000 $65,000 $65,000 $65,000 $65,000 S&A $30,000 $30,000 $30,000 $30,000 $30,000 Depreciation $30,000 $30,000 $30,000 $30,000 $30,000 Investment in NWC $1,000 $500 $500 $500 $500 $500 Investment in Gross PPE $150,000 The project will last 5 years and has the same risk as the typical Dawg Incorporated project.  The firm has a capital structure of 30.00% debt and... A firm has projected the following financials for a possible project: YEAR 0 1 2 3... A firm has projected the following financials for a possible project: YEAR 0 1 2 3 4 5 Sales 129,409.00 129,409.00 129,409.00 129,409.00 129,409.00 Cost of Goods 69,540.00 69,540.00 69,540.00 69,540.00 69,540.00 S&A 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 Depreciation 20,465.20 20,465.20 20,465.20 20,465.20 20,465.20 Investment in NWC 1,014.00 582.00 582.00 582.00 582.00 582.00 Investment in Gross PPE 102,326.00 The firm has a capital structure of 41.00% debt and 59.00% equity. The cost of debt is 9.00%, while the cost of... A firm has projected the following financials for a possible project: 3 5 2 YEAR 0... A firm has projected the following financials for a possible project: 3 5 2 YEAR 0 1 134,994.00 134,994.00 134,994.00 134,994.00 Sales 134,994.00 62,673.00 62,673.00 62,673.00 62,673.00 Cost of Goods 62,673.00 30,000.00 30,000.00 30,000.00 30,000.00 S&A 30,000.00 21,318.60 21,318.60 21,318.60 21,318.60 21,318.60 Depreciation 558.00 558.00 558.00 558.00 558.00 1,044.00 Investment in NWC Investment in Gross PPE 106,593.00 The firm has a capital structure of 36.00% debt and 64.00% equity. The cost of debt is 10.00%, while the cost of equity... A firm has projected the following financials for a possible project: YEAR 0 1 2 3... A firm has projected the following financials for a possible project: YEAR 0 1 2 3 5 4 Sales 134,994.00 134,994.00 134,994.00 134,994.00 134,994.00 Cost of Goods 62,673.00 62,673.00 62,673.00 62,673,00 62,673.00 S&A 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 Depreciation 21,318.60 21,318.60 21,318.60 21,318.60 21,318.60 Investment in NWC 1,044.00 558.00 558,00 558.00 558.00 558.00 Investment in Gross PPE 106,593.00 The firm has a capital structure of 36.00% debt and 64.00% equity. The cost of debt is 10.00%, while the cost of... Consider the following two projects: Project Year 0 Year 1 Year 2 Year 3 Year 4... Consider the following two projects: Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Discount C/F C/F C/F C/F C/F C/F C/F C/F Rate Alpha - 79 20 25 30 35 40 NA NA 15% Beta - 80 25 25 25 25 25 25 25 16% Assume that projects Alpha and Beta are mutually exclusive. The correct investment decision and the best rationale for that decision is to O A invest in... FCF for the following: Year 0: Year 1: Year 2: Year 3: Year 4: Year 5:... FCF for the following: Year 0: Year 1: Year 2: Year 3: Year 4: Year 5: NPV? PI? IRR? (Related to Checkpoint 12.1) (Comprehensive problem calculating project cash flows, NPV, PI, and IRR) Traid Winds Corporation, a firm in the 36 percent marginal tax bracket with a required rate of return or discount rate of 12 percent, is considering a new project. This project involves the introduction of a new product. The project is expected to last 5 years and... Year 1 Year 2 Year 3 Year 4 Unit sales 4,200 4,100 4,300 4,400 Sales price... Year 1 Year 2 Year 3 Year 4 Unit sales 4,200 4,100 4,300 4,400 Sales price $29.82 $30.00 $30.31 $33.19 Variable cost per unit $12.15 $13.45 $14.02 $14.55 Fixed operating costs except depreciation $41,000 $41,670 $41,890 $40,100 Accelerated depreciation rate 33% 45% 15% 7% This project will require an investment of $20,000 in new equipment. The equipment will have no salvage value at the end of the project’s four-year life. Yeatman pays a constant tax rate of 40%, and it... tion 1 Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000... tion 1 Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of re-9, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $3 per year at $49 per share. Also, its common stock currently sells for $30 per share the next expected dividend, D, is $3.25; and the dividend is expected to... ADVERTISEMENT Free Homework Help App Download From Google Play Scan Your Homework to Get Instant Free Answers Need Online Homework Help? Ask a Question Get Answers For Free Most questions answered within 3 hours. ADVERTISEMENT Share Your Knowledge Post an Article +5 Coins Post an Answer +5 Coins Post a Question with Answer +5 Coins ADVERTISEMENT Active Questions Assume one of your finals has 50 questions on it, and lucky for you, it's all... asked 11 minutes ago Rice Products in Bangladesh Business behavior is derived in large part from the basic cultural environment... asked 1 hour ago The following base sequence is found for a mRNA fragment from wild-type E. coli: 5'- UAUCAGUAGAUAAUGUAACC-3'... asked 1 hour ago For this exercise, round all regression parameters to three decimal places. One of the two tables... asked 2 hours ago What is the 5% level of significance for mean = 3.60, standard deviation = 0.94, and... asked 2 hours ago Prior to beginning work on this discussion, please read the article by Hayley Peterson, 15 Companies... asked 2 hours ago Which pair of aqueous solutions, when mixed, will form a precipitate? A) NaNO3 and AgC2H3O2 B)... asked 3 hours ago 1-Write an algorithm to get two numbers from the user (as inputs) and calculate the sum... asked 6 hours ago Define white-collar crime. What is the difference between offender and offense-based definitions of white-collar crime? What... asked 7 hours ago Consider a reaction which is 1st order with respect to A and 1st order with respect... asked 7 hours ago c++ The length of the hypotenuse of a right-angled triangle is the square root of the... asked 7 hours ago When a metal rod is heated, not only its resistance but also its length and cross‐sectional... asked 7 hours ago ADVERTISEMENT DMCA About Contact Terms of Use Privacy Policy Academic Honesty Policy Homework Answer Scanner App © 2013-2022 ZuoTi.Pro user contributions licensed under cc by-sa 4.0