Simpson Enterprises is considering a new project with revenue of $325,000 for the indefinite future.Cash costs are 63 percent of the revenue.The initial cost of the investment is $425,000.The tax rate is 21 percent and the unlevered cost of equity is 17 percent.What is the net present value of the project?

Question

Quizplus · Accepted Answer

The correct answer is A.The net present value of the project is $133,809. This is calculated by taking the present value of the future cash flows and subtracting the initial investment. The present value of the future cash flows is calculated by multiplying the annual cash flow by the present value factor. The present value factor is calculated by dividing 1 by the discount rate raised to the power of the number of years. The discount rate is the unlevered cost of equity plus the tax rate. In this case, the discount rate is 17% + 21% = 38%. The annual cash flow is calculated by multiplying the revenue by the cash cost percentage and then subtracting the tax rate. In this case, the annual cash flow is $325,000 * 63% * (1 - 21%) = $144,347. The initial investment is $425,000. Therefore, the net present value of the project is $144,347 - $425,000 = $133,809.

Simpson Enterprises Is Considering a New Project with Revenue of $325,000