Question

Simpson Enterprises is considering a new project with cash inflows of $325,000 for the indefinite future. Cash costs are 63 percent of the cash inflows. The initial cost of the investment is $425,000. The tax rate is 35 percent and the unlevered cost of equity is 17 percent. What is the net present value of the project?

Answer 1

$ 459,779.41

Step-by-step explanation:

Given:

Cash inflows = $ 325,000

Cash costs of the cash inflows = 63%

Initial cost of the investment = $ 425,000

Tax rate = 35%

Unlevered cost of equity = 17%

cash flow after cash cost = $ 325,000 - (0.63 × $ 325,000 ) = $ 120,250

Cash flow after tax = cash flow after cash cost - Tax

or

Cash flow after tax = $ 120,250 - (0.35 × $ 120,250) = $ 78,162.5

Now,

The Present value of cash inflows

= (cash flows after tax / Unlevered cost of equity ) = $ 459,779.41