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 equity is estimated at
12.00%. The tax rate facing the firm is 38.00%. (Assume that you
can't recover the final NWC position in year 5. i.e. only consider
the change in NWC for each year)
What is the NPV of the project? (Hint: Be careful about rounding the WACC here!)
Homework Answers
Let us first find after tax cost of debt
After tax cost of debt = Before tax cost of debt(1-tax rate)
= 9%(1-38%)
= 9%(1-0.38)
= 9%(0.62)
= 5.58%
Statement showing WACC
| Particulars | Weight | Cost of capital | WACC |
| a | b | c =axb | |
| Equity | 59% | 12.00% | 7.08% |
| Debt | 41% | 5.58% | 2.29% |
| WACC | 9.37% |
Thus WACC = 9.37%
Statement showing NPV
| Particulars | 0 | 1 | 2 | 3 | 4 | 5 | NPV = sum of PV |
| Sales | 129409.00 | 129409.00 | 129409.00 | 129409.00 | 129409.00 | ||
| Cost of Goods | -69540.00 | -69540.00 | -69540.00 | -69540.00 | -69540.00 | ||
| S&A | -30000.00 | -30000.00 | -30000.00 | -30000.00 | -30000.00 | ||
| Depreciation | -20465.20 | -20465.20 | -20465.20 | -20465.20 | -20465.20 | ||
| PBT | 9403.80 | 9403.80 | 9403.80 | 9403.80 | 9403.80 | ||
| Tax @ 38% | -3573.44 | -3573.44 | -3573.44 | -3573.44 | -3573.44 | ||
| PAT | 5830.36 | 5830.36 | 5830.36 | 5830.36 | 5830.36 | ||
| Add: Depreciation | 20465.20 | 20465.20 | 20465.20 | 20465.20 | 20465.20 | ||
| Annual cash flow | 26295.56 | 26295.56 | 26295.56 | 26295.56 | 26295.56 | ||
| Investment in Gross PPE | -102326 | ||||||
| Investment in NWC | -1014 | 432 | 0 | 0 | 0 | 0 | |
| Total cash flow | -103340 | 26727.56 | 26295.56 | 26295.56 | 26295.56 | 26295.56 | |
| PVIF @ 9.37% | 1.0000 | 0.9143 | 0.8360 | 0.7644 | 0.6989 | 0.6390 | |
| PV | -103340.00 | 24437.74 | 21982.95 | 20099.61 | 18377.63 | 16803.17 | -1638.89 |
Thus NPV = -1638.89 $
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