Bob's Taco Shop is considering a two-year project with an initial cost of $102,000 and cash...

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Finance

Bob's Taco Shop is considering a two-year project with aninitial cost of $102,000 and cash inflows of $65,000 in year oneand $74,000 in year two.
The firm's debt-equity ratio is 0.45 and the after-tax cost ofdebt is 4.8 percent. You estimate that the cost of equity is 12.7percent, and the tax rate is 35 percent. Calculate the net presentvalue of this project using the firm's WACC.
$16,938
$15,411
$16,333
$17,840
$15,809

Answer & Explanation Solved by verified expert

3.6 Ratings (517 Votes)

Computation of WACC


Debt/equity =		0.45
thereore Debt / Total asset =		31.03%
equity / total asset =		68.97%

after tax cost of debt =		4.80%
Cost of equity =		12.70%

WACC
Source	weight	cost of capital	weight * cost
debt	31.03%	4.80%	1.49%
equity	68.97%	12.70%	8.76%
WACC			10.25%

Computation of NPV
i	ii	iii	iv=ii*iii
year	Cashflow	PVIF @ 10.25%	present value
0	-102000	1.0000	(102,000.00)
1	65000	0.9070	58,957.84
2	74000	0.8227	60,881.89
NPV =			17,840

therefore correct answer is option =			$ 17,840

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Transcribed Image Text

Bob's Taco Shop is considering a two-year project with aninitial cost of $102,000 and cash inflows of $65,000 in year oneand $74,000 in year two.The firm's debt-equity ratio is 0.45 and the after-tax cost ofdebt is 4.8 percent. You estimate that the cost of equity is 12.7percent, and the tax rate is 35 percent. Calculate the net presentvalue of this project using the firm's WACC.$16,938$15,411$16,333$17,840$15,809