Alpha Industries is considering a project with an initial cost of $8.3 million. The project will produce cashinflows of $1.73 million per year for 7 years. The project has the same risk as the firm. The firm has a pretaxcost of debt of 5.70 percent and a cost of equity of 11.33 percent. The debt-equity ratio is .63 and the taxrate is 35 percent. What is the net present value of the project?

Initial cost = $8,300,000Cash Inflow = $1,730,000Useful life = 7 yearsPretax cost of debt =…

Answered: Alpha Industries is considering a…

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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Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk-free rate and issues new equity to cover the remainder. In this situation, the cost of capital for the firm's levered equity is closest to:

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