Webster's latest project has an initial cost of $1.23 million and unlevered perpetual cash flows of $238,000.The firm has a debt-equity ratio of .42,a pretax cost of debt of 7.6 percent,a cost of equity of 13.3 percent,and a tax rate of 21 percent.What is the NPV of the project?

Question

Quizplus · Accepted Answer

The NPV of the project is calculated using the formula for the value of a perpetuity: NPV = (Cash Flow / WACC) - Initial Cost. First, calculate the WACC using the formula: WACC = (E/V * Re) + (D/V * Rd * (1-Tc)), where E/V is the equity proportion, D/V is the debt proportion, Re is the cost of equity, Rd is the cost of debt, and Tc is the tax rate. With a debt-equity ratio of 0.42, E/V = 1/(1+0.42) and D/V = 0.42/(1+0.42). Plug in the values to find WACC, then use it to find the NPV.

Webster's Latest Project Has an Initial Cost of $1