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 % and the cost of equity is 11 %. The tax rate is 34 %. What is the projected net present value of this project?

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The correct answer is A. The project's NPV is $2,501.The project's cash flows are $33,000 per year for two years. The initial cost of the project is $55,000. The firm's debt-equity ratio is .35. The after-tax cost of debt is 6%. The cost of equity is 11%. The tax rate is 34%.The WACC is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)WACC = (.65) * .11 + (.35) * .06 * (1 - .34)WACC = .0715 or 7.15%The NPV is calculated as follows:NPV = -Initial Cost + Sum of PV of Cash FlowsNPV = -$55,000 + $33,000 / (1 + .0715)^1 + $33,000 / (1 + .0715)^2NPV = $2,501

Bertelli's Is Analyzing a Project with an Initial Cost of $55,000