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Find the correct net present value of the project

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Reference no: EM132596318

Question - You have been asked to assess the net present value of a project analysis done by analysts at Ludens Inc., a firm that operates in both retailing and apparel production. The project, which is in the apparel business, has a 10-year life with equal annual cash flows over the period and an initial investment of $ 1 billion. You notice two problems with the analysis:

The analyst used a cost of capital of 10% (which is the company's cost of capital) in computing the net present value of $ 100 million. The cost of capital for the apparel business is 12%.

The analyst expensed the entire investment in year 0; you believe that this is not likely to get approval from the tax authorities, and that you would need to depreciate the investment straight line over 10 years to a salvage value of zero. The tax rate is 30%.

Find the correct net present value of the project.

Reference no: EM132596318

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