Granite Graphics has a pretax cost of debt of 7.68 percent and a cost of equity

Question

Granite Graphics has a pretax cost of debt of 7.68 percent and a cost of equity of 15.2 percent. The firm uses the subjective approach to determine project discount rates. Currently, the firm is considering a project to which it has assigned an adjustment factor of -0.5 percent. The firm's tax rate is 34 percent and its debt-equity ratio is 0.45. The project has an initial cost of $4.3 million and produces cash inflows of $1.27 million a year for 5 years. What is the net present value of the project?

Explanation / Answer

Computation of Cost of Capital (7.68*.66) * .45 + (15.2 * .55) .= 10.64 Less: Adjustment factor -.5 .= 10.14 Caclucation of NPV Year 0 1 2 3 4 5 Initial Cost -4.3 Cash inflows 1.27 1.27 1.27 1.27 1.27 Tax @ 34% 0.4318 0.4318 0.4318 0.4318 0.4318 Cash Inflows after tax -4.3 0.8382 0.8382 0.8382 0.8382 0.8382 PVF @10.14 % 1 0.908 0.824 0.748 0.68 0.617 -4.3 0.761086 0.690677 0.626974 0.569976 0.517169 NPV (1.13) million

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