Think about what is appropriate discount rate

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Reference no: EM131539434

Your boss is considering an investment in new manufacturing equipment. The equipment costs $270,000 and will provide annual after-tax inflows of $45,000 at the end of each of the next 7 years. The firm’s market value debt/equity ratio is 25%, its cost of equity is 17%, and its pretax cost of debt is 9%. The firm’s tax rate is 40%. Assume the project is of approximately the same risk as the firm’s existing operations.

-What is the weighted average cost of capital? What is the NPV of the proposed project (Think about what is appropriate discount rate)?

-The company decides to increase its market value debt/equity ratio to 30%. Assume that the cost of equity and the cost of debt stay the same. What is the new weighted average cost of capital?

-What is the NPV after the capital structure change?

Reference no: EM131539434

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