The Webster Corp. is planning construction of a new shipping depot for its single manufacturing plant. The initial cost of the investment is $1 million. Efficiencies from the new depot are expected to reduce costs by $100,000 for each of the next 20 years. The corporation has a total value of $60 million and has outstanding debt of $40 million. What is the NPV of the project if the firm has an after tax cost of debt of 6% and a cost equity of 9%?

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Quizplus · Accepted Answer

The NPV is calculated using the weighted average cost of capital (WACC) as the discount rate. The WACC is calculated as follows:  WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)  Where:  E = Market value of equity = $20 million  D = Market value of debt = $40 million  V = E + D = $60 million  Re = Cost of equity = 9%  Rd = Cost of debt = 6%  Tc = Corporate tax rate (not provided, assume 0 for simplicity)  WACC = (20/60) * 9% + (40/60) * 6% = 7%  The NPV is then calculated using the formula:  NPV = ∑ (Cash flow / (1 + WACC)^t) - Initial investment  NPV = ($100,000 / 0.07) * (1 - (1 / (1 + 0.07)^20)) - $1,000,000  NPV ≈ $59,401