WACC and NPV: "Bertelli's is analyzing a project with an initial cost of $55,000..."
Hi guys i have this question here and i have solved it to my best ability if anyone can confirm whether this is correct i'd really appreciate it.
Bertelli's is analyzing a project with an initial cost of $55,000 and cash inflows of $33,000 a year for two years. This project is an extension of the firm's current operations and thus is equally as risky as the current firm. The firm uses only debt and common stock to finance their operations and maintains a debt-equity ratio of .35. The after-tax cost of debt is 6 percent and the cost of equity is 11 percent. The tax rate is 34 percent. What is the projected net present value of this project?
D/E ratio: 0.35
Weight of Debt = Debt-Equity Ratio / (1 + Debt-Equity Ratio) = .35/ (1+.35) = .259 or 26%
Weight of Equity = 1 / (1 + Debt-Equity Ratio) = 1 / (1 + .35) = .740 or 74%
Cost of debt = 6%
Cost of equity = 11%
Tax rate = 34%
WACC = (E/V) x Re + (Dm/V) x (Rd x (1-t))
= .26 x .06 + .74 x (.11x.66)
= 0.0693 or 6.93%
NPV = -$55000 + $33000/(1+WACC)^1 + $33000/(1+WACC)^2
= -$55000 + $33000/(1.0693) + 33000/(1.0693)^2
= $4722.539
Hi guys i have this question here and i have solved it to my best ability if anyone can confirm whether this is correct i'd really appreciate it.
Bertelli's is analyzing a project with an initial cost of $55,000 and cash inflows of $33,000 a year for two years. This project is an extension of the firm's current operations and thus is equally as risky as the current firm. The firm uses only debt and common stock to finance their operations and maintains a debt-equity ratio of .35. The after-tax cost of debt is 6 percent and the cost of equity is 11 percent. The tax rate is 34 percent. What is the projected net present value of this project?
D/E ratio: 0.35
Weight of Debt = Debt-Equity Ratio / (1 + Debt-Equity Ratio) = .35/ (1+.35) = .259 or 26%
Weight of Equity = 1 / (1 + Debt-Equity Ratio) = 1 / (1 + .35) = .740 or 74%
Cost of debt = 6%
Cost of equity = 11%
Tax rate = 34%
WACC = (E/V) x Re + (Dm/V) x (Rd x (1-t))
= .26 x .06 + .74 x (.11x.66)
= 0.0693 or 6.93%
NPV = -$55000 + $33000/(1+WACC)^1 + $33000/(1+WACC)^2
= -$55000 + $33000/(1.0693) + 33000/(1.0693)^2
= $4722.539