Final answer:
The NPV of a firm's investment is calculated by discounting its future free cash flows back to the present value using the discount rate, then subtracting the investment cost. A positive NPV indicates a good investment, whereas a negative NPV does not.
Step-by-step explanation:
The student is asking about the Net Present Value (NPV) of a firm's investment, specifically considering the future free cash flows and the cost of raising new equity capital. To calculate the NPV, one must discount the expected free cash flows back to their present value using the firm's discount rate, which in this case is 9.55%. Since the firm expects to earn $14,288,250 annually, you would use this amount as the cash flow in each period for the calculation.
The NPV is found by taking the present value of these future free cash flows and subtracting the initial investment outlay. The investment costs $80,604,684, so we must compare the present value of the free cash flows to this amount. The NPV calculation involves discounting each year's cash flow by the formula PV = FCF / (1 + r)^n, where PV is the present value, FCF is the free cash flow, r is the discount rate, and n is the number of periods.
If the NPV is positive, it suggests that the investment would add value to the firm. However, if NPV is negative, it would indicate that the cost of the investment outweighs the present value of the expected cash flows and therefore would not be a financially viable investment. Please note that this is a simplified explanation, and to get an accurate NPV calculation, you would need to perform this calculation for each future period and sum them up.