Question
KOL Inc. is considering a 5-year project which requires a $413,000 machine. The CCA rate is 20% and it will be sold for $76,000 when
KOL Inc. is considering a 5-year project which requires a $413,000 machine. The CCA rate is 20% and it will be sold for $76,000 when the project ends. The machine is the only asset in the asset class. The project is expected to generate before tax cash flows of $325,000 per year for 5 years. The firm's target debt-to-equity ratio is 0.7. If the project is financed by all equity, the cost of capital would be 11%. The corporate tax rate is 33%. To finance the machine, KOL plans to borrow $279,000 at 6% and to repay one half of the loan at the end of year 3 and the remaining balance at year 5.
- Using the adjusted present value method, calculate the NPV of the project.
- Using the weighted average cost of capital method, calculate the NPV of the project.
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