A project is expected to generate $10M in sales next year. The annual costs are expected to be 30% of sales. The tax rate is 20%. The after-tax cash flow is expected to remain constant forever. The initial investment is $14.74M in debt and $35.26M in equity. The target debt ratio for the project is 25%. The unlevered cost of capital is 10% and the cost of debt is 5%. Find the NPV of the project using the FTE method.
A project is expected to generate $10M in sales next year. The annual costs are expected to be 30% of sales. The tax rate is 20%. The after-tax cash flow is expected to remain constant forever. The initial investment is $14.74M in debt and $35.26M in equity. The target debt ratio for the project is 25%. The unlevered cost of capital is 10% and the cost of debt is 5%. Find the NPV of the project using the FTE method.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A project is expected to generate $10M in sales
next year. The annual costs are expected to be
30% of sales. The tax rate is 20%. The after-tax
cash flow is expected to remain constant forever.
The initial investment is $14.74M in debt and
$35.26M in equity. The target debt ratio for the
project is 25%. The unlevered cost of capital is 10%
and the cost of debt is 5%. Find the NPV of the
project using the FTE method.
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