Alpha Industries is considering a project with an initial cost of $8.2 million. The project will produce cash inflows of $1.93 million per year for 6 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.67% and a cost of equity of 11.31%. The debt-equity ratio is 0.62 and the tax rate is 21%. What is the net present value of the project

$347,941.73

Explanation:

First, find the Weighted Average Cost of Capital (WACC). WACC is the minimum return that a project must offer before it can be accepted. It is thus used to discount the future cash flows of a project to its Present Value.

WACC = Ke × E/V + Kd × D/V

where,

Ke = cost of equity

    = 11.31%

E/V = Market Weight of Equity

      = (1/1.62 × 100)

      = 61.73%

Kd = After tax cost of debt

     = 5.67% × ( 1  - 0.21)

     = 4.48 %

D/V = Market Weight of Debt

      = 0.65/1.65 × 100

      = 39.40%

Therefore,

WACC =  11.31% × 0.6773 + 4.48 % × 0.3940

           = 9.43 %

Next, find the net present value of the project using a financial calculator as follows :

CFj -$8,200,000

CFj $1,930,000

CFj $1,930,000

CFj $1,930,000

CFj $1,930,000

CFj $1,930,000

i/yr =  9.43 %

Shift NPV = $347,941.73

1   all nations face the problem of scarcity because there are limited resources and unlimited wants. nations do not have enough factors of production to produce everything that their population wants. entrepreneurial resources initiate businesses to make new goods and services; labor resources produce goods and services.

2 there are four factors of production: natural resources, labor resources, capital resources, and entrepreneurial resources. natural resources are raw materials from nature that are used to produce goods. trees, water, and grains are natural resources. some natural resources, such as wheat and cattle, are renewable

3 wants

things that you do not need to have in order to survive, but would like to have

needs

things that you must have in order to survive

goods

physical products

services

tasks that a business perform for customers

resources

items that people can use to make or obtain what they need or want

determine

to settle or decide by choice of alternatives or possiblities

4 i really dont know

answer; break-even analysis;