View the step-by-step solution to:

# A proposed project lasts 3 years and has an initial investment of \$500,000. The after tax cash flows are estimated at \$120,000 for year 1, \$240,000...

A proposed project lasts 3 years and has an initial investment of \$500,000. The after tax cash
flows are estimated at \$120,000 for year 1, \$240,000 for year 2, and \$240,000 for year 3. The
firm has a target debt/equity ratio of 0.6. The firm’s cost of equity is 15% and its cost of debt is
8%. The tax rate is 35%. What is the NPV of this project? (hint: remember that the D/E is
saying that debt is 60% of equity. In other words, you need to find D/A and E/A for the
appropriate weights using the formulas:
D/E/(1+ D/E) =% or weight of debt and 1/(1+D/E) = % or weight of equity.)

NPV of the proposed project is (\$24,600) as calculated below
Target debt equity ratio = 0.6
If debt is 0.6, equity is 1
Therefore, total capital is 0.6+1 = 1.6
Weight of debt = debt/ total capital...

## This question was asked on Dec 03, 2013 and answered on Dec 11, 2013.

### Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors and customizable flashcards—available anywhere, anytime.

### -

Educational Resources
• ### -

Study Documents

Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access or to earn money with our Marketplace.

Browse Documents