Suppose that Caterpillar Incorporated is considering a new line of construction graders. To launch the new...

Free

50.1K

Verified Solution

Question

Finance

Suppose that Caterpillar Incorporated is considering a new lineof construction graders. To launch the new product, Caterpillarwill have to invest $200.00 million. The target capital structurefor Caterpillar is 45.00% debt and 55.00% equity (marketvalues).
The CFO for the company believes that new debt can be issuedwith an 8.00% annual coupon rate. After reviewing the company’sbeta, the CFO also believes that common stockholders require a15.00% return for the new investment.
The company projects an annual after-tax cash flow of $65.00million for the new project. The company has a marginal tax rate of35.00%, and expects to run the project for 10.00 years.
What is the NPV for the project?(express in millions)

Answer & Explanation Solved by verified expert

3.8 Ratings (342 Votes)

Net present value is equal to present value of cash inflow less present value of cash outflow

Calculation of Weighted average cost of capital to be used at discount rate to calculate NPV

After tax cost of debt is 8%*(1-0.35)	5.20%
WACC	Weight of equityCost of equity + Weight of debtCost of debt
WACC	(0.550.15)+(0.450.052)
WACC	10.59%

Calculation of net present value
Year	Cash flow	Discount factor @ 10.59%		Present Value (Cash inflow*Discount factor)
0	-200	1.00000	1/(1.1059^0)	-200.000
1	65	0.90424	1/(1.1059^1)	58.776
2	65	0.81765	1/(1.1059^2)	53.147
3	65	0.73935	1/(1.1059^3)	48.058
4	65	0.66855	1/(1.1059^4)	43.456
5	65	0.60453	1/(1.1059^5)	39.295
6	65	0.54664	1/(1.1059^6)	35.532
7	65	0.49430	1/(1.1059^7)	32.129
8	65	0.44696	1/(1.1059^8)	29.053
9	65	0.40416	1/(1.1059^9)	26.271
10	65	0.36546	1/(1.1059^10)	23.755
		NPV		189.471
The net present value of the project is $189.471 million

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Suppose that Caterpillar Incorporated is considering a new lineof construction graders. To launch the new product, Caterpillarwill have to invest $200.00 million. The target capital structurefor Caterpillar is 45.00% debt and 55.00% equity (marketvalues).The CFO for the company believes that new debt can be issuedwith an 8.00% annual coupon rate. After reviewing the company’sbeta, the CFO also believes that common stockholders require a15.00% return for the new investment.The company projects an annual after-tax cash flow of $65.00million for the new project. The company has a marginal tax rate of35.00%, and expects to run the project for 10.00 years.What is the NPV for the project?(express in millions)