Alpha Industries is considering a project with an initial cost of $7.4 million.

Question

Alpha Industries is considering a project with an initial cost of $7.4 million. The project
will produce cash inflows of $1.54 million a year for 7 years. The firm uses the subjective
approach to assign discount rates to projects. For this project, the subjective adjustment is
+1.5 percent. The firm has a pre-tax cost of debt of 8.6 percent and a cost of equity of 13.7
percent. The debt-equity ratio is 0.65 and the tax rate is 35 percent. What is the net present
value of the project?
Hint: You need to compute the firm

Explanation / Answer

WACC = (1/1.65)(0.137) + (0.65/1.65)(0.0086)(1-0.35) = 0.105051
Projecct WACC = 0.105051 + 0.015 = 0.120051 = 12.0051%
NPV = -7,400,000 + (1,540,000)(PVIDA7,12.0051%) = -372,951

A) -$372,951

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