Please show your work or you will not be rated. Alpha Industries is considering

Question

Please show your work or you will not be rated.

Alpha Industries is considering a project with an initial cost of $7.4 million. The project will produce cash inflows of $1.54 million a year for 7 years. The firm uses the subjective approach to assign discount rates to projects. For this project, the subjective adjustment is +1.5 percent. The firm has a pre-tax cost of debt of 8.6 percent and a cost of equity of 13.7 percent. The debt-equity ratio is 0.65 and the tax rate is 35 percent. What is the net present value of the project? Hint: You need to compute the firm's WACC and the project Discount Rate first. Also, note that the stream of cash inflows is an annuity. Note: The two first answer choices are negative. -$372,951 -$187,016 $48.209 $133,333 $269,480

Explanation / Answer

Hi, If you like my answer rate me first...that way only I can earn points. Thanks D/E = 0.65 wd = D/D+E =0.65/0.65+1 = 0.394 we = E/D+E = 0.606 WACC = wd*rd*(1-t) + we*re = 0.394*8.6%*(1-35%) + 0.606*13.7% = 10.606% Subject adjustment = 1.5% So required rate of return = 10.606% +1.5% = 12.106% K=1.12106^-1 NPV = -$7.4 million + $1.54*(K + K^2 +.... +K^7) = $1.1807 million

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