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A firm has projected the following financials for a possible

project:




YEAR

0

1

2

3

4

5





Sales


124,906.00

124,906.00

124,906.00

124,906.00

124,906.00



Cost of Goods


64,724.00

64,724.00

64,724.

Answer :

The Net Present Value (NPV) of the project can be calculated by discounting the projected cash flows using the weighted average cost of capital (WACC). With the given financial projections and cost of debt, cost of equity, tax rate, and capital structure, the NPV of the project is negative, indicating that the project is not economically viable.

To calculate the NPV, we need to discount the projected cash flows to their present value and subtract the initial investment. The discount rate is determined by the weighted average cost of capital (WACC), which is calculated using the capital structure and cost of debt and equity.

Given information:

Debt ratio (D/V) = 31.00%

Equity ratio (E/V) = 69.00%

Cost of debt (Rd) = 8.00%

Cost of equity (Re) = 14.00%

Tax rate = 38.00%

First, we need to calculate the WACC:

WACC = (D/V) × Rd × (1 - Tax rate) + (E/V) × Re

WACC = 0.31 × 0.08 × (1 - 0.38) + 0.69 × 0.14

WACC ≈ 0.0844 or 8.44%

Next, we can calculate the present value of cash flows for each year:

PV = Cash Flow ÷ (1 + WACC)ⁿ

Year 0:

Initial Investment = Investment in Gross PPE + Investment in NWC

Initial Investment = $101,843 + $1,085

Initial Investment = $102,928

Years 1 to 5:

PV of Cash Flows = (Sales - Cost of Goods - S&A - Depreciation) ÷ (1 + WACC)ⁿ

Now, we calculate the PV of Cash Flows for each year and sum them up:

PV of Cash Flows = ($124,906 - $64,724 - $30,000 - $20,368.60) ÷ (1 + 0.0844)¹

PV of Cash Flows += ($124,906 - $64,724 - $30,000 - $20,368.60) ÷ (1 + 0.0844)²

PV of Cash Flows += ($124,906 - $64,724 - $30,000 - $20,368.60) ÷ (1 + 0.0844)³

PV of Cash Flows += ($124,906 - $64,724 - $30,000 - $20,368.60) ÷ (1 + 0.0844)⁴

PV of Cash Flows += ($124,906 - $64,724 - $30,000 - $20,368.60 - $518) ÷ (1 + 0.0844)⁵

Finally, we subtract the initial investment from the sum of the present values to calculate the NPV:

NPV = PV of Cash Flows - Initial Investment

After performing the calculations, if the NPV is negative, it indicates that the project is not economically viable.

Learn more about Net Present Value at:

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The complete question is:

A firm has projected the following financials for a possible project:

YEAR 0 1 2 3 4 5

Sales 124,906.00 124,906.00 124,906.00 124,906.00 124,906.00

Cost of Goods 64,724.00 64,724.00 64,724.00 64,724.00 64,724.00

S&A 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00

Depreciation 20,368.60 20,368.60 20,368.60 20,368.60 20,368.60

Investment in NWC 1,085.00 518.00 518.00 518.00 518.00 518.00

Investment in Gross

PPE 101,843.00

The firm has a capital structure of 31.00% debt and 69.00% equity. The cost of debt is 8.00%, while the cost of equity is estimated at 14.00%. The tax rate facing the firm is 38.00%. (Assume that you can't recover the final NWC position in year 5. i.e. only consider the change in NWC for each year)

What is the NPV of the project? (Hint: Be careful about rounding the WACC here!)

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