Orchard Farms has a pretax cost of debt of 7.68 percent and a cost of equity of 15.2 percent.The firm uses the subjective approach to determine project discount rates.Currently,the firm is considering a project to which it has assigned an adjustment factor of -0.5 percent.The firm's tax rate is 34 percent and its debt-equity ratio is 0.45.The project has an initial cost of $4.3 million and produces cash inflows of $1.27 million a year for 5 years.What is the net present value of the project?

Question

Quizplus · Accepted Answer

Project cost of capital = [(1/1.45)(0.152) + (0.45/1.45)(0.0768)(1 - 0.34)] - 0.005 = 0.115558NPV = -$4.3m + $1.27m(PVIFA_{5, 11.5558%}) = $328,895

Orchard Farms Has a Pretax Cost of Debt of 7