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Math Help - Net Present Value

  1. #1
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    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%?
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  2. #2
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    I hardly can wait to see your first attempt.
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  3. #3
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    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?
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  4. #4
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    Good, but that's only the first sentence. What about the other two?
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  5. #5
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    I think you are referring to its Debt-Equity ratio of 0.67, but I have no idea what to do with it.
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  6. #6
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    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.
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  7. #7
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    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
    ?
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  8. #8
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    One more prod: That's one year. Does it change over time? Read your definitions very carefully.
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  9. #9
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    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.
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  10. #10
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    There's a name for that. "a clue".
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