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Homework answers / question archive / XYZ Inc
XYZ Inc. is considering a new project with perpetual revenue of $650.000, cash costs of $420,000, and a tax rate of 35 percent. The firm plans to issue $350,000 of debt at an interest rate of 9 percent to help finance the initial project cost of $850,000. The levered discount rate is 12.5 percent.
What is the net present value of this project? (Do not round your intermediate calculations. Round only your final answer up to 2 decimal places, if necessary. Note: Your final answer most be in dollars without the $ sign at the beginning)
| Computation of Net Present Value of the Project: | |
| Particulars | Amount |
| Perpetual Cash Flows | 650000 |
| Less: Cash Costs | 420000 |
| Earnings before Interest and Tax (EBIT) | 230000 |
| Less: Interest on Debt (350000*9%) | 31500 |
| Earnings before Tax (EBT) | 198500 |
| Less: Tax @35% | 69475 |
| Net Income | 129025 |
| Present Value (129025/12.5%) | 1032200 |
| Less: Initial Cost (850000-350000) | 500000 |
| Net Present Value | 532200.00 |
So, Net Present Value of the Project is $532,200.
