A project will last 20 years and require an initial investment of 5 million dollars today. Expenses
Question:
A project will last 20 years and require an initial investment of 5 million dollars today. Expenses will be 2 million in year 1, 100,000 in year 2 and then they will grow 4% per year for the duration of the project. You will not gain any revenue in year 1 but will gain 500K in revenue in year 2, then 1 million in revenue in year 3, 2 million in revenue in year 4, and 5 million in revenue in year 5. Revenue will then grow at 5% per year for the duration of the project. The preferred weights for costs of capital are 20% for preferred stock, 40% for debt, and 60% for common equity. The corporate tax rate is 40%. The cost of preferred stock is 4%, the cost of debt is 9% and the cost of common equity is 12% (with no flotation costs).
A. What is the internal rate of return for this project? (write down the percentage number with 2 decimal places)
B. What is the weighted average cost of capital? (again write this as a percentage with 2 decimal places)
C. What would be the undiscounted value of this project? (use 2 decimal places)
D. What is the Net Present value of this project using the Weighted Average Cost of Capital you found above? (use 2 decimal places in your answer)
Valuation The Art and Science of Corporate Investment Decisions
ISBN: 978-0133479522
3rd edition
Authors: Sheridan Titman, John D. Martin