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Using the Weighted Average Cost of Capital in a Budgeting Decision 10) Your firm has an average-risk...

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Finance

Using the Weighted Average Cost of Capital in a BudgetingDecision

10) Your firm has an average-risk project under consideration.You choose to fund the project in the same manner as the firm'sexisting capital structure. If the cost of debt is 8.00%, the costof preferred stock is 11.00%, the cost of common stock is 14.00%,and the WACC adjusted for taxes is 13.00%, what is the NPV of theproject, given the expected cash flows listed here?

Category

T0

T1

T2

T3

Investment

-$2,000,000

NWC

-$250,000

$250,000

Operating Cash Flow

$850,000

$850,000

$850,000

Salvage

$50,000

Total Incremental Cash Flow

-$2,250,000

$850,000

$850,000

$1,150,000

A) -$74,121

B) $-35,105

C) $2,214,895

D) $2,479,604

PLEASE SHOW WORK

Answer & Explanation Solved by verified expert
4.3 Ratings (501 Votes)

Category T0 T1 T2 T3
Investment ($2,000,000)
NWC ($250,000) $250,000
Operating Cash Flow $850,000 $850,000 $850,000
Salvage $50,000
A Total Incremental Cash Flow ($2,250,000) $850,000 $850,000 $1,150,000
B PVIF @ 13%                1.0000          0.8850          0.7831          0.6931
C=A*B Present value        (2,250,000)        752,212        665,675        797,008        (35,105)
therefore NPV =              (35,105)
Ans = Option B -35105

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Using the Weighted Average Cost of Capital in a BudgetingDecision10) Your firm has an average-risk project under consideration.You choose to fund the project in the same manner as the firm'sexisting capital structure. If the cost of debt is 8.00%, the costof preferred stock is 11.00%, the cost of common stock is 14.00%,and the WACC adjusted for taxes is 13.00%, what is the NPV of theproject, given the expected cash flows listed here?CategoryT0T1T2T3Investment-$2,000,000NWC-$250,000$250,000Operating Cash Flow$850,000$850,000$850,000Salvage$50,000Total Incremental Cash Flow-$2,250,000$850,000$850,000$1,150,000A) -$74,121B) $-35,105C) $2,214,895D) $2,479,604PLEASE SHOW WORK

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