Using the Weighted Average Cost of Capital in a Budgeting Decision 10) Your firm has an average-risk...

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Using the Weighted Average Cost of Capital in a BudgetingDecision
10) Your firm has an average-risk project under consideration.You choose to fund the project in the same manner as the firm'sexisting capital structure. If the cost of debt is 8.00%, the costof preferred stock is 11.00%, the cost of common stock is 14.00%,and the WACC adjusted for taxes is 13.00%, what is the NPV of theproject, given the expected cash flows listed here?
Category
T0
T1
T2
T3
Investment
-$2,000,000
NWC
-$250,000
$250,000
Operating Cash Flow
$850,000
$850,000
$850,000
Salvage
$50,000
Total Incremental Cash Flow
-$2,250,000
$850,000
$850,000
$1,150,000
A) -$74,121
B) $-35,105
C) $2,214,895
D) $2,479,604

PLEASE SHOW WORK

Answer & Explanation Solved by verified expert

4.3 Ratings (501 Votes)

	Category	T0	T1	T2	T3
	Investment	($2,000,000)
	NWC	($250,000)			$250,000
	Operating Cash Flow		$850,000	$850,000	$850,000
	Salvage				$50,000
A	Total Incremental Cash Flow	($2,250,000)	$850,000	$850,000	$1,150,000
B	PVIF @ 13%	1.0000	0.8850	0.7831	0.6931
C=A*B	Present value	(2,250,000)	752,212	665,675	797,008	(35,105)


	therefore NPV =	(35,105)

	Ans = Option B	-35105

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Using the Weighted Average Cost of Capital in a BudgetingDecision10) Your firm has an average-risk project under consideration.You choose to fund the project in the same manner as the firm'sexisting capital structure. If the cost of debt is 8.00%, the costof preferred stock is 11.00%, the cost of common stock is 14.00%,and the WACC adjusted for taxes is 13.00%, what is the NPV of theproject, given the expected cash flows listed here?CategoryT0T1T2T3Investment-$2,000,000NWC-$250,000$250,000Operating Cash Flow$850,000$850,000$850,000Salvage$50,000Total Incremental Cash Flow-$2,250,000$850,000$850,000$1,150,000A) -$74,121B) $-35,105C) $2,214,895D) $2,479,604PLEASE SHOW WORK

Category	T0	T1	T2	T3
Investment	-$2,000,000
NWC	-$250,000			$250,000
Operating Cash Flow		$850,000	$850,000	$850,000
Salvage				$50,000
Total Incremental Cash Flow	-$2,250,000	$850,000	$850,000	$1,150,000