Final answer:
To determine the NPV of the firm’s investment, the expected annual free cash flows are discounted by the given discount rate of 9.55%, treating them as a perpetuity. Subtracting the cost to raise equity from the present value of the cash flows yields an NPV of $69,147,148, indicating the value added to the firm by the investment.
Step-by-step explanation:
To calculate the net present value (NPV) of the firm's investment, we will discount the firm's expected future cash flows by the appropriate discount rate. The firm expects annual free cash flows of $14,288,250.
We will treat these cash flows as perpetuity since no end is specified. The formula for the present value of a perpetuity is PV = C / r, where C is the cash flow and r is the discount rate. In this case, PV = $14,288,250 / 0.0955 = $149,751,832.
The firm plans to raise $80,604,684 for the investment. By subtracting the initial investment from the present value of future cash flows, we find the NPV. Thus, NPV = $149,751,832 - $80,604,684 = $69,147,148.
The final answer is that the NPV of the firm’s investment is $69,147,148. This calculation considers the yearly free cash flows and uses a discount rate of 9.55%. This means the investment would increase the value of the firm by that amount, assuming no other capital market imperfections besides corporate taxes and costs of financial distress.