Required: a) Calculate the weighted average cost of capital (WACC) for XYZ Co. Ltd. b) Using the WACC for XYZ Co., estimate the net present value (NPV) for the future cash flows expected by the company from the investment to be made in 2022.
Required: a) Calculate the weighted average cost of capital (WACC) for XYZ Co. Ltd. b) Using the WACC for XYZ Co., estimate the net present value (NPV) for the future cash flows expected by the company from the investment to be made in 2022.
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:Question 4
XYZ Company Ltd. is planning to invest in machinery worth $10 million in 2022. The
company projects the following cashflows resulting from the new investment over the
next 3 years. By the end of the 3 years, the machinery would have been fully
depreciated:
2023: $4,500,000
2024: $5,000,000
● 2025: $4,000,000
●
●
XYZ Co Ltd. is also planning to finance the investment
We
machinery with an issue of
$ 3 million of equity to shareholders combined with debt of $ 7 million. Assuming a
risk-free yield of 1% on US Treasury bills, an after-tax cost of debt of 3.5% for XYZ
Co., expected stock market returns of 10% and XYZ shares exhibit a beta of 1.2 times
the returns on the broader stock market.
=>
Required:
a) Calculate the weighted average cost of capital (WACC) for XYZ Co. Ltd.
b) Using the WACC for XYZ Co., estimate the net present value (NPV) for the future
cash flows expected by the company from the investment to be made in 2022.
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