Your firm has an average-risk project under consideration.You choose to fund the project in the same manner as the firm's existing capital structure.If the cost of debt is 8.00%,the cost of preferred stock is 11.00%,the cost of common stock is 14.00%,and the WACC adjusted for taxes is 13.00%,what is the NPV of the project,given the expected cash flows listed here? $$\begin{array} { | l | c | c | c | c | }
\hline \text { Category } & \mathrm { T } _ { 0 } & \mathrm {~T} _ { 1 } & \mathrm {~T} _ { 2 } & \mathrm {~T} _ { 3 } \
\hline \text { Investment } & - \$ 2,000,000 & & & \
\hline \text { NWC } & - \$ 250,000 & & & \$ 250,000 \
\hline \text { Operating Cash Flow } & & \$ 850,000 & \$ 850,000 & \$ 850,000 \
\hline \text { Salvage } & & & & \$ 50,000 \
\hline \text { Total Incremental Cash Flow } & - \$ 2,250,000 & \$ 850,000 & \$ 850,000 & \$ 1,150,000 \
\hline
\end{array}$$
A)-$74,121
B)$-35,105
C)$2,214,895
D)$2,479,604

Question

Your firm has an average-risk project under consideration.You choose to fund the project in the same manner as the firm's existing capital structure.If the cost of debt is 8.00%,the cost of preferred stock is 11.00%,the cost of common stock is 14.00%,and the WACC adjusted for taxes is 13.00%,what is the NPV of the project,given the expected cash flows listed here? $$\begin{array} { | l | c | c | c | c | } 
\hline \text { Category } & \mathrm { T } _ { 0 } & \mathrm {~T} _ { 1 } & \mathrm {~T} _ { 2 } & \mathrm {~T} _ { 3 } \
\hline \text { Investment } & - \$ 2,000,000 & & & \
\hline \text { NWC } & - \$ 250,000 & & & \$ 250,000 \
\hline \text { Operating Cash Flow } & & \$ 850,000 & \$ 850,000 & \$ 850,000 \
\hline \text { Salvage } & & & & \$ 50,000 \
\hline \text { Total Incremental Cash Flow } & - \$ 2,250,000 & \$ 850,000 & \$ 850,000 & \$ 1,150,000 \
\hline
\end{array}$$
A)-$74,121
B)$-35,105
C)$2,214,895
D)$2,479,604

Quizplus · Accepted Answer

The NPV is calculated using the WACC as the discount rate. Given the WACC is 13%, we discount the future cash flows back to present value and subtract the initial investment. The calculation is as follows:$$ NPV = -\$2,250,000 + \frac{\$850,000}{(1+0.13)^1} + \frac{\$850,000}{(1+0.13)^2} + \frac{\$1,150,000}{(1+0.13)^3} $$$$ NPV = -\$2,250,000 + \$752,212 + \$665,487 + \$811,196 = -\$35,105 $$Thus, the NPV of the project is -$35,105, indicating it would slightly decrease the firm's value.

Your Firm Has an Average-Risk Project Under Consideration A)-$74,121 B)$-35,105 C)$2,214,895 D)$2,479,604

Your Firm Has an Average-Risk Project Under Consideration A)-$74,121
B)$-35,105
C)$2,214,895
D)$2,479,604