Webster is planning construction of a new shipping depot for its single manufacturing plant.The initial cost of the investment is €1 million.Eﬃciencies from the new depot are expected to reduce
Costs by €100,000 forever.The corporation has a total value of €60 million and has outstanding
Debt of €40 million.What is the NPV of the project if the ﬁrm has an after tax cost of debt of 6% and
A cost equity of 9%?

Question

Quizplus · Accepted Answer

The NPV of the project can be calculated using the formula: NPV = (Savings / WACC) - Initial Investment. The WACC is calculated as (E/V * Cost of Equity) + (D/V * Cost of Debt), where E is equity, D is debt, and V is the total value of the firm. Here, WACC = (20/60 * 9%) + (40/60 * 6%) = 7%. Therefore, NPV = (€100,000 / 0.07) - €1,000,000 = €428,571.

Webster Is Planning Construction of a New Shipping Depot for Its