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Waterdeep Adventure Travel has an unlevered cost of equity of 16
Waterdeep Adventure Travel has an unlevered cost of equity of 16.7%, and a cost of debt of 6.8%. Their tax rate is 42%, and they maintain a capital structure of 57% debt and the rest equity. They are considering giving cave exploration tours to their menu of adventure vacations. Buying the needed equipment would cost $79,504, and would bring in $20,732 one year from today, and $81,870 two years from today. What is the NPV of this project, using the WACC method, if they invest today?
Please give your answer to the nearest dollar.
Expert Solution
First we calculate WACC:
WACC= We*Re + Wd*Rd*(1-T)
Here,
We= Weight of Equity = 1-57%= 43%
Re= Cost of Equity = 16.7%
Wd= Weight of Debt = 57%
Rd= Cost of Debt = 6.8%
T= Tax rate = 42%
So,
WACC= 0.43*0.167+0.57*0.068*(1-0.42)
= 0.07181+0.02248
WACC= 0.0943 or 9.43%
Now we calculate NPV of the Project:
NPV= PV of Cash Flows- Initial cost
Given,
Initial cost (C )= $79,504
Cash flow for year 1 (CF1)= $20,732 and Cash flow for year 2 (CF2)= $81,870
NPV= 20,732/(1+9.43%)+81870/(1+9.43%)^2-79504
= 18945.60+68,369.01-79504
NPV = $7810.61
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