The Webster Corp. 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 is calculated using the formula: NPV = (Cash Flow / WACC) - Initial Investment. The WACC is calculated as (E/V * Re) + (D/V * Rd * (1-T)). Here, E/V = 20/60, D/V = 40/60, Re = 9%, Rd = 6%, and assuming no taxes (T=0), WACC = 7%. NPV = ($100,000 / 0.07) - $1,000,000 = $428,571.