Background: Bancroft Inc. has summarized the expected cash flows from a proposed

Question

Background: Bancroft Inc. has summarized the expected cash flows from a proposed project below.

The project's WACC is 9.5% and the NPV is: $22,794.32.

QUESTION:

Bancroft Inc. is going to use factory sapce for this project that it usually rents to other firms. If this project is accepted, Bancroft will not be able to rent the space anymore. If the firm usually generates $10,000 per year in afer-tax leasing revenue from the factory space, what is the value of the project when you consider this factor?

Assume Bancroft still considers the project to have average risk and uses a WACC of 9.5%.

Explanation / Answer

Hi, Annual income would decrease by 10000, so it will be 110000 (120000-10000) = -400000 + 110000/(1+.095)^1 + 110000/(1+.095)^2 + 110000/(1+.095)^3 + 110000/(1+.095)^4 + 55000/(1+.095)^4 = 9,250.49 (negative) Thanks, Aman

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