Photochronograph Corporation (PC) manufactures time series photographic equipmen

Question

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .57. It's considering building a new $71.2 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.87 million in perpetuity. There are three financing options a. A new issue of common stock: The required return on the company's new equity is 15 percent. b. A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.2 percent, they will sell at par c. Increased use of accounts payable financing: Because this financing is part of the company's ongoing daily business, the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of.15. (Assume there is no difference between the pretax and aftertax accounts payable cost.) If the tax rate is 30 percent, what is the NPV of the new plant? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to 2 decimal places, e.g., 32.16.) Net present value

Explanation / Answer

NPV of the plant = Initial Investment + PV( after tax cash flows)= -71.2 + PV(after tax cash flows)

PV(after tax cash flows) = 7.87/WACC ( since it is to perpetuity)

WACC = kd* Wd*(1-t) + Ke* We

We = 1/1+0.57 = 1/1.57 =0.6369

Ke = 15%

Wd= 0.3630

Kd= 7.2%

WACC = 11.383%

PV(after tax cash flows) = 7.87/11.383% = 69.13

NPV = 69.13 - 71.2 = - $ 2.06

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