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 forever.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 formula: NPV = (Cash Flow / WACC) - Initial Investment. The WACC is calculated as (E/V * Re) + (D/V * Rd * (1-T)). Assuming no taxes, WACC = (20/60 * 9%) + (40/60 * 6%) = 7%. NPV = ($100,000 / 0.07) - $1,000,000 = $428,571.