You are considering a project that will cost $750,000 in upfront costs and will produce $90,000...

 

Transcribed Image Text:

You are considering a project that will cost $750,000 in upfront costs and will produce $90,000 per year in EBIT for the next 15 years. This project will be financed with 60% debt, 40% equity. You can borrow at 5.5% and pay a corporate tax rate of 28%. The asset beta for this project is 0.6, the riskless rate is 3%, and the expected return on an index fund is 16%. What is the NPV of this project, using the WACC method? Assuming all cash flows are perpetual, under what circumstances would you expect the FTE method to reject a project that the APV method would accept? What serious problem could this cause for a firm? You are considering a project that will cost $750,000 in upfront costs and will produce $90,000 per year in EBIT for the next 15 years. This project will be financed with 60% debt, 40% equity. You can borrow at 5.5% and pay a corporate tax rate of 28%. The asset beta for this project is 0.6, the riskless rate is 3%, and the expected return on an index fund is 16%. What is the NPV of this project, using the WACC method? Assuming all cash flows are perpetual, under what circumstances would you expect the FTE method to reject a project that the APV method would accept? What serious problem could this cause for a firm?

Answer rating: 100% (QA)

To calculate the Net Present Value NPV of the project using the Weighted Average Cost of Capital WAC... View the full answer