The Bakery is considering a new prject it considers to be a little riskier than
ID: 2798697 • Letter: T
Question
The Bakery is considering a new prject it considers to be a little riskier than its current operations. Thus, management has decided to add and aditional 1.5% to the company's overall cost of capiysl when evaluating this project. The project has an initial cash outlay of $40,000 and projected cash inflows of $17,000 in year one, $28,000 in year two, and $30,000 in year three. The firm uses 25% debt and 75% common stock as its capital structure. The company's cost of equity is 15.5% while the after-tax cost of debt for the firm is 6.1%. What is the net present value for the new project?
Explanation / Answer
WACC=25%*6.1%+75%*15.5%=13.15%
Risk adjusted discount rate=13.5%+1.5%=15%
NPV=-40000+17000/1.15+28000/1.15^2+30000/1.15^3=15680.12
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