National Electric Company NEC is considering a 451 million p

National Electric Company (NEC) is considering a $45.1 million project in its power systems division. Tom Edison, the company\'s chief financial officer, has evaluated the project and determined that the project\'s unlevered cash flows wil be $32 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment Issuing 10-year bonds or issuing common stock. The company\'s pretax cost of debt is 79 percent, and its cost of equity is 11.8 percent. The company\'s target debt-to-value ratio is 75 project has the same risk as the company\'s existing businesses, and it will support the same amount of debt. The tax rate is 40 percent Calculate the weighted average cost of capital (Do not round intermediate calculations and enter your answer as a peicent rounded to 2 decimal places, e.g-32.16.) Weighted average cost of capital 6.51 % Calculate the net present value of the project (Enter your answer in dollars, not milions of dollars, e.g/ 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) Net present value 6.018.210.86 eBook & Resources eRook 18.3 Weighted Average Cost of Ca Check my work Brevious atteme 0 ype here to searc

Solution

RWACC =

[debt / (debt + equity )](1 – tax rate)RB + [equity(debt+equity )]RS

1.) calculating WACC of the company :
RWACC = [debt / (debt + equity )](1 – tax rate)RB + [equity(debt+equity )]RS
RWACC = 0.75(1 – 0.40)(0.079) + 0.2(0.118)
RWACC = 0.06505 or 6.51%
2.)NPV = -$45,100,000 + ( $3,200,000 / 0.0651)
NPV = $4,055,145.93