Precision Devices Corporation has a debt-equity ratio of 0.45 and a tax rate of

Question

Precision Devices Corporation has a debt-equity ratio of 0.45 and a tax rate of 40%.  Its cost of equity is 11.2% and its pre-tax cost of debt is 7.9%.  What is its Weighted Average Cost of Capital (WACC)?

A machine costs $1,000, has a three-year life,   and has an estimated salvage value of $100.  It will generate after-tax   annual cash flows (ACF) of $600 a year, starting next year.  Suppose   Infinity Medical Group%u2019s required rate of return for the project is 8%.   What is the NPV of this investment?

       $626 $546 $900 -$150

A machine costs $1,000, has a three-year life,   and has an estimated salvage value of $100.  It will generate after-tax   annual cash flows (ACF) of $600 a year, starting next year.  Suppose   Infinity Medical Group%u2019s required rate of return for the project is 8%.   What is the NPV of this investment?

Explanation / Answer

WACC = 0.45*7.9*(1-0.4)/1.45 + 1*11.2/1.45 = 9.19%

NPV = -1000+600/1.08 + 600/1.08^2 + 600/1.08^3 + 100/1.08^3 = $626

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