Respuesta :
Answer: Net present value = $446,556
Explanation:
First we'll compute the Weighted Average Cost of Capital :
Weighted Average Cost of Capital = [tex]K_{e} \times W_{e} + K_{d} \times W_{d}[/tex]
= 0.163×[tex]\frac{1}{1.48}[/tex] + 0.0729× (1 - 0.35 )× [tex]\frac{0.48}{1.48}[/tex]
= 0.1255
where;
[tex]K_{e}[/tex] = Cost of equity
[tex]W_{e}[/tex] = Proportion of equity
[tex]K_{d}[/tex] = Cost of debt
[tex]W_{d}[/tex] = Proportion of debt
Now, we'll compute the cost of capital using the following formula:
Cost of capital = Weighted Average Cost of Capital + adjustment factor
= 0.1255 + 0.0125
= 0.138 or 13.8%
∴ Net present value = Cash outflows - Total PV of cash flows
= $3,900,000 - $1,260,000 (Annuity value of 13.8% for 5 years)
[tex]= 3,900,000 - 1260000 \times \frac{[1-(1+13.8)^{-5}]}{13.8}[/tex]
= $3,900,000 - $3,453,444
= $446,556
Therefore, the correct answer is option(b).
