Webster Corp.is planning to build a new shipping depot.The initial cost of the investment is $1.18 million.Efficiencies from the new depot are expected to reduce aftertax annual costs by $105,000 forever.The corporation has a total value of $62.4 million and has outstanding debt of $38.7 million.What is the NPV of the project if the firm has an aftertax cost of debt of 5.8 percent and a cost equity of 12.6 percent?

Question

Quizplus · Accepted Answer

The correct answer is A because the NPV of the project is $72,581. The NPV is calculated as follows:NPV = -Initial Investment + Present Value of Future Cash FlowsNPV = -$1.18 million + $105,000 / (12.6% - 5.8%)NPV = -$1.18 million + $105,000 / 6.8%NPV = -$1.18 million + $1.54 millionNPV = $72,581