A firm has a capital structure of 25% debt and 75% equity.Debt can be issued at a return of 9%,while the cost of equity for the firm is 12%.The firm is considering a $50 million expansion of their production facility.The project has the same risk as the firm overall and will earn $10 million per year for 7 years.What is the NPV of the expansion if the tax rate facing the firm is 40%?

Question

Quizplus · Accepted Answer

WACC = .25*9%*(1-.4)+ .75*12% = 10.35%
N = 7,I = 10.35%,PV = ?,PMT = $10,FV = $0
PV = $48.1
NPV = $48.1 - $50 = -$1.9

A Firm Has a Capital Structure of 25% Debt and 75