# Net Present Value

• Nov 16th 2009, 03:34 PM
djcomlab
Net Present Value
Acme Co. wants to build a new facility that requires an initial investment of \$1 million and will reduce costs by \$100,000 forever. The company has a total value of \$600,000 and outstanding debt of \$400,000. What is the NPV of this project if the company has an after tax cost of debt of 6% and a cost of equity of 9%?
• Nov 16th 2009, 08:22 PM
TKHunny
I hardly can wait to see your first attempt.
• Nov 17th 2009, 05:27 AM
djcomlab
Behold my first attempt:

Cash Inflow = 100,000
Present value (PV) = 100,000 / 0.09 = 1,111,111
NPV = PV - 1,000,000 = 111,111

Does anyone know the correct answer?
• Nov 17th 2009, 08:44 AM
TKHunny
Good, but that's only the first sentence. What about the other two?
• Nov 17th 2009, 10:59 AM
djcomlab
I think you are referring to its Debt-Equity ratio of 0.67, but I have no idea what to do with it.
• Nov 17th 2009, 04:21 PM
TKHunny
Too bad. You used the magic words. If you truly have "no idea", you should not have been given this problem unless it is a placement exam. If you truly have "no idea" you have not read your book or attended class and need to have a nice chat with your academic advisor and remember to discuss whether or not you should be in this class.

Sorry. When you have an idea, we can talk.
• Nov 18th 2009, 06:30 AM
djcomlab
I would probably say the same thing in your position...

600,000*9% = 54,000
400,000*6% = 24,000

Therefore NPV = PV -78,000 = 1,033,111
?
• Nov 19th 2009, 04:14 AM
TKHunny
One more prod: That's one year. Does it change over time? Read your definitions very carefully.
• Nov 19th 2009, 04:53 AM
djcomlab
Okay, so if I calculate the WACC as 7%, then this gives me:
PV = 100,000 / 7% = 1,428,571
NPV = 428,571

Now its starting to make sense.
• Nov 19th 2009, 05:01 PM
TKHunny
There's a name for that. "a clue". (Happy)