Orchard Farms has a pretax cost of debt of 7.29 percent and a cost of equity of 16.3 percent.The firm uses the subjective approach to determine project discount rates.Currently, the firm is considering a project to which it has assigned an adjustment factor of 1.25 percent.The firm's tax rate is 35 percent and its debt-equity ratio is .48.The project has an initial cost of $3.9 million and produces cash inflows of $1.26 million a year for 5 years.What is the net present value of the project?

Question

Quizplus · Accepted Answer

To find the NPV, first calculate the weighted average cost of capital (WACC) using the firm's cost of debt, cost of equity, tax rate, and debt-equity ratio. Adjust the WACC by the project's adjustment factor. Then, discount the project's cash inflows at this adjusted WACC and subtract the initial cost. The correct NPV is $446,556.

Orchard Farms Has a Pretax Cost of Debt of 7