Question

Company c is 25% financed by risk-free debt and 75% by equity. the treasury bill rate is 2.35%, the expected market rate of return is 15%, and the beta of the company’s common stock is 1.2. tax rate is 20%. the firm is considering a project that is equally as risky as the overall firm. the project has a required investment of $3 million and annual cash inflows of $430,000 at the end of each year for five years. what is the npv of the project?

Answer 1

The NPV of the project is approximately -$2,299,518.35.

Step-by-step explanation:

To calculate the NPV of the project, we need to discount the cash inflows at the project's required rate of return and subtract the initial investment. The required rate of return is calculated using the weighted average cost of capital (WACC). Given that the company is 25% financed by risk-free debt and 75% by equity, we can calculate the WACC as follows:

WACC = (debt / total capital) * (1 - tax rate) * risk-free rate + (equity / total capital) * expected market rate of return * beta

Plugging in the values, WACC = (0.25 * (1 - 0.2) * 0.0235) + (0.75 * 0.15 * 1.2) = 0.065775 or 6.5775%

Now, we can calculate the NPV using the formula:

NPV = (cash inflows / (1 + WACC)^year) - initial investment

Substituting the values, NPV = ((430,000 / (1 + 0.065775)^1) + (430,000 / (1 + 0.065775)^2) + (430,000 / (1 + 0.065775)^3) + (430,000 / (1 + 0.065775)^4) + (430,000 / (1 + 0.065775)^5)) - 3,000,000

Solving this equation, NPV = $700,481.65 - 3,000,000 = -$2,299,518.35

Therefore, the NPV of the project is approximately -$2,299,518.35.