The Bakery is considering a new project it considers to be a little riskier than its current operations. Thus, management has decided to add an additional 1.5 percent to the company's overall cost of capital when evaluating this project. The project has an initial cash outlay of $62,000 and projected cash inflows of $17,000 in year one, $28,000 in year two, and $30,000 in year three. The firm uses 25 percent debt and 75 percent common stock as its capital structure. The company's cost of equity is 15.5 percent while the aftertax cost of debt for the firm is 6.1 percent. What is the projected net present value of the new project?

Question

Quizplus · Accepted Answer

WACC_Firm = (0.75 F1F1F1S1F1F1F10 0.155) + (0.25 F1F1F1S1F1F1F10 0.061) = 0.1315WACC_Project = 0.1315 + 0.015 = 0.1465NPV = -$62,000 + ($17,000/1.1465) + ($28,000/1.1465²) + ($30,000/1.1465³) = -$5,964

The Bakery Is Considering a New Project It Considers to Be