The Justus Center is analyzing a project with an initial cost of $197,000 and cash inﬂows of $65,000 a year for 4 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 its operations and
Maintains a debt-equity ratio of .55. The pre-tax cost of debt is 9 percent, the cost of equity is 14
Percent, and the tax rate is 35 percent. What is the net present value of this project?

Question

Quizplus · Accepted Answer

The correct answer is A because the net present value of the project is $4,194. The project has an initial cost of $197,000 and cash inflows of $65,000 a year for 4 years. The 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 its operations and maintains a debt-equity ratio of .55. The pre-tax cost of debt is 9 percent, the cost of equity is 14 percent, and the tax rate is 35 percent.

The Justus Center Is Analyzing a Project with an Initial