Asked by
Danielle Reber
on Dec 09, 2024
Verified
A company has a project with an initial after-tax cash savings of $40,000 at the end of the first year. These savings will increase by 2% annually. The firm has a debt-equity ratio of 1/3, a cost of equity of 16%, a cost of debt of 10%, and a 35% tax rate. The project is equal in risk to the current overall risk of the company. What is the present value of the project?
A) $321,906
B) $343,938
C) $355,800
D) $357,021
E) $361,016
Debt-Equity Ratio
A metric reflecting how company assets are proportionally financed by shareholders' equity and debt.
Cost of Equity
The return that investors expect for investing in a company's equity, considering the risk of the investment.
After-Tax Cash Savings
The increase in cash flow that results after all applicable taxes have been deducted from the gross income.
- Determine the Net Present Value (NPV) for a project and recognize its critical role in project analysis.
- Implement cost of capital theories, such as the weighted average cost of capital (WACC), for assessing projects.
- Evaluate the effect of a project's risk on its required rate of return and capital cost.
Verified Answer
JD
Learning Objectives
- Determine the Net Present Value (NPV) for a project and recognize its critical role in project analysis.
- Implement cost of capital theories, such as the weighted average cost of capital (WACC), for assessing projects.
- Evaluate the effect of a project's risk on its required rate of return and capital cost.