Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .65, but the industry target debt- equity ratio is .60. The industry average beta is 1.05. The market risk premium is 7.2 percent and the risk-free rate is 4.8 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 21 percent. The project requires an initial outlay of $840,000 and is expected to result in a $104,000 cash inflow at the end of the first year. The project will be financed at the company's target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 5 percent until the end of the fifth year and remain constant forever thereafter. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV
Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .65, but the industry target debt- equity ratio is .60. The industry average beta is 1.05. The market risk premium is 7.2 percent and the risk-free rate is 4.8 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 21 percent. The project requires an initial outlay of $840,000 and is expected to result in a $104,000 cash inflow at the end of the first year. The project will be financed at the company's target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 5 percent until the end of the fifth year and remain constant forever thereafter. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV
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
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Transcribed Image Text:Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project.
The company currently has a target debt-equity ratio of .65, but the industry target debt-
equity ratio is .60. The industry average beta is 1.05. The market risk premium is 7.2
percent and the risk-free rate is 4.8 percent. Assume all companies in this industry can
issue debt at the risk-free rate. The corporate tax rate is 21 percent. The project requires
an initial outlay of $840,000 and is expected to result in a $104,000 cash inflow at the
end of the first year. The project will be financed at the company's target debt-equity
ratio. Annual cash flows from the project will grow at a constant rate of 5 percent until
the end of the fifth year and remain constant forever thereafter.
Calculate the NPV of the project. (Do not round intermediate calculations and round
your answer to 2 decimal places, e.g., 32.16.)
NPV
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