A company has a project with an initial after-tax cash savings of $40,000 at the end of the ﬁrst year. These savings will increase by 2% annually. The ﬁrm has a debt-equity ratio of 1/3, a cost of equity
Of 16%, a cost of debt of 10%, and a 35% tax rate. The project is equal in risk to the current overall
Risk of the company. What is the present value of the project?

Question

Quizplus · Accepted Answer

The present value of the project is calculated using the growing perpetuity formula: PV = C / (r - g), where C is the initial cash flow, r is the discount rate, and g is the growth rate. The discount rate is the weighted average cost of capital (WACC), which is calculated using the firm's debt-equity ratio, cost of equity, cost of debt, and tax rate. The WACC is approximately 13.3%, and using the formula, the present value is closest to $343,938.

A Company Has a Project with an Initial After-Tax Cash