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National Electric Company (NEC) is considering a $45.06 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that the project’s unlevered cash flows will be $3.16 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. The company’s pretax cost of debt is 7.5 percent, and its cost of equity is 11.4 percent. The company’s target debt-to-value ratio is 85 percent. The project has the same risk as the company’s existing businesses, and it will support the same amount of debt. The tax rate is 35 percent.
Calculate the weighted average cost of capital. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Weighted average cost of capital %
Calculate the net present value of the project. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Net present value $
A decrease in interest rates decreases the net present value of an investment.
Please explain the three major categories of the statement of cash flows and under which category the following item belongs. Also explain whether or not the item would be considered a source or use of cash for the period in question:
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According to the capital asset pricing model, this is not a good investment.
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