NPV of a project

R

rbcc

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Nov 18, 2009
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Hi i'm trying to do the flowing question.


debt to equity ratio=4/10 which corresponds to 4/14 weighting for debt and 10/14 weighting for equity.


then WACC= (4/14)(0.08)+(10/14)(0.05)=0.059


since there is 50 000 in pretax savings and 1 000 in costs then the cash flows before taxes would be 49 000 right?


then the present value of that would be \(\displaystyle \frac{1-\frac{1}{1.059^3}}{0.059}\)* 49 000 * (1-0.30) right?



Thanks
Rbcc
 
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I would really appreciate any help or insight. I'm not sure if this is correct. There is an error in the question, the machine will be salvaged in year 3.

F
 
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so more generally, the present value of cash flows would be the additional profit right? In which case it makes sense to do a calculation for rev-exp, taxes are payed on profits so multiplying the value by 1-tax rate would be applied right?

and the cost of debt, i don't know what else it would be
 
Well, what's being taught: how to calculate PV's / FV's or "The Laws of Taxation"?
Click to expand...

the former, but i'm just trying to get some insight into the problem ( since a tax rate is given, tax considerations are relevant). the way i did it seems to make sense but i don't know for sure...:|
 
why? its actually my own ( perhaps misguided) logic
 
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I would really appreciate any comments, is there something in the question that is unclear, maybe I missed something?
 
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