Jackson Installers wants to purchase $1,255,800 of new equipment in order to lower annual operating costs by $420,000. The equipment will be depreciated straight-line to a zero book value over its 4-year life, and then sold for $66,200. The company must hold an extra $272,200 of inventory during the project. The company has a target debt-equity ratio of 0.88. Their cost of equity is 9.6, and the pretax cost of debt is 8.8. Assume a 21 percent tax rate.

Calculate the project's NPV.

WACC = %

NPV = $

Now suppose that Jackson Installers needs to raise external financing in order to purchase the new equipment. The company's flotation cost for equity is 7.60 percent, and 6.25 percent for debt. Calculate the new NPV for the project.

Average flotation cost = %

NPV = $

If Jackson Installers can finance the equity portion of the equipment internally, what is the NPV of the project?

Average flotation cost = %

NPV = $

Answer rating: 100% (QA)

Cost of new equipment 1255800 Depreciation per annum 313950 Operating Cost savings 420000 Salvage value 66200 Debt Equity Ratio 088 Cost of equity Ke ... View the full answer