Alpha Industries is considering a project with an initial cost of $7.4 million.The project will produce cash inflows of $1.54 million a year for seven years.The firm uses the subjective approach to assign discount rates to projects.For this project,the subjective adjustment is +1.5 percent.The firm has a pretax cost of debt of 8.6 percent and a cost of equity of 13.7 percent.The debt-equity ratio is 0.0.65 and the tax rate is 35 percent.What is the net present value of the project?

Question

Quizplus · Accepted Answer

WACC = (1/1.65)(0.137) + (0.65/1.65)(0.086)(1 - 0.35) = 0.105051Project WACC = 0.105051 + 0.015 = 0.120051NPV = -$7.4m + ($1.54m)(PVIFA_{7, 12.0051%}) = -$372,951

Alpha Industries Is Considering a Project with an Initial Cost