Hartley, Inc. needs to purchase equipment for its 2,000 drive-ins nationwide. The total cost of the equipment is $2 million. It is estimated that the after-tax cash inﬂows from the project will be
$210,000 annually in perpetuity. Hartley has a market value debt-to-assets ratio of 40%. The ﬁrm's
Cost of equity is 13%, its pre-tax cost of debt is 8%, and the ﬂotation costs of debt and equity are 2%
And 8%, respectively. The tax rate is 34%. Assume the project is of similar risk to the ﬁrm's existing
Operations.
After considering ﬂotation costs, what is the NPV of the proposed project?

Question

Quizplus · Accepted Answer

The Answer of Hartley, Inc. needs to purchase equipment for its 2,000 drive-ins nationwide. The total cost of the equipment is $2 million. It is estimated that the after-tax cash inﬂows from the project will be
$210,000 annually in perpetuity. Hartley has a market value debt-to-assets ratio of 40%. The ﬁrm's
Cost of equity is 13%, its pre-tax cost of debt is 8%, and the ﬂotation costs of debt and equity are 2%
And 8%, respectively. The tax rate is 34%. Assume the project is of similar risk to the ﬁrm's existing
Operations.
After considering ﬂotation costs, what is the NPV of the proposed project?