Compute the WACC to determine the project's NPV

(Answer key: WACC = 13.99% and NPV =-2137.4)

2. Big Company LTD is investigating whether or not to proceed with project X. It is considered that project X is of the same nature of business as all existing operations and as a result the firm present WACC can be used to calculate its viability. The cash flows associated with the project are as follows: Year Net Cash Flow -20,000 2000 5000 5000 15,000 Other information BALANCE SHEET OF BIG COMPANY (8 thousands) Current Assets 10,000 Current Liabilities 8,000 Net fixed Assets 25,000 Long-term debt 10,000 Investments 15,000 Deferred taxes 3,000 Shareholders' equity 30.000 Total 50,000 Total 50,000 Corporate Tax Rate Number of shares on issue Current Share Price Equity Beta Expected Return on the Market Risk Free Rate applicable 30% 10 million $ 7.25 1.47 12% 7% Long Term Debt consists of 'Junk" Bonds issued at a face value of $ 7 million. These pay interest semi-annually at a rate of 16% p.a. (compounding semi-annually). They have 3 years to maturity. Long Term Debt also includes a secured liability to Huge Company Ltd which currently sits in the books at $3 million. Interest is payable annually on this at a fixed rate of 10% p.a. (which is also the current market rate for this liability). The market yield on the junk bonds is 18%p.a. (compounding semi- annually) Compute the WACC of Big Company and determine the project's NPV