Your company is considering an investment in a project which would - 11288

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Your company is considering an investment in a project which would require an initial outlay of $300,000 and produce expected cash flows in Years 1 through 5 of $87,385 per year. You have determined that the current after-tax cost of the firm’s capital (required rate of return) for each source of financing is as follows: 

Cost of debt8%

Cost of preferred stock12%

Cost of common stock16%

Long-term debt currently makes up 20% of the capital structure, preferred stock 10%, and common stock 70%. What is the net present value of this project?

A.   $1,568 B.   $463 C.   $1,241 D.   $871 

Solution Description

Your company is considering an investment in a project which would require an initial outlay of $300,000 and produce expected cash flows in Years 1 through 5 of $87,385 per year. You have determined that the current after-tax cost of the firm’s capital (required rate of return) for each source of financing is as follows:

Cost of debt 8%