Orchard farms has a pretax cost of debt of 7.29 percent and a cost of equity of 16.3 percent. the firm uses the subjective approach to determine project discount rates. currently, the firm is considering a project to which it has assigned an adjustment factor of 1.25 percent. the firm's tax rate is 35 percent and its debt-equity ratio is .48. the project has an initial cost of $3.9 million and produces cash inflows of $1.26 million a year for 5 years. what is the net present value of the project? a. $421,619b. $446,556c. $514,370d. $561,027e. $478,721

Net present value =  $446,556

Explanation:

First we'll compute the Weighted Average Cost of Capital :

Weighted Average Cost of Capital =

= 0.163× + 0.0729× (1 - 0.35 )×  

= 0.1255

where;

= Cost of equity

= Proportion of equity

= Cost of debt

= 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)

= $3,900,000 - $3,453,444

= $446,556

Therefore, the correct answer is option(b).

b, fewer problems later! good luck

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