20. Husky Inc. is considering a capital expansion project. The initial investment of undertaking this project is $214,500. This expansion project will last for five years. The net operating cash flows from the expansion project at the end of year 1, 2, 3, 4 and 5 are estimated to be $50,850, $69,783, $71,332, $81,236 and $107,750 respectively.
Husky has a capital structure consisting of 60% debt and 40% equity. The after-tax cost of debt is 15% and the cost of equity is 37.50%.
Based on Huskyâs weighted average cost of capital calculated, what is the NPV of undertaking this expansion project? That is, what is the NPV if the weighted average cost of capital is used as the discount rate? Shall Husky undertake the investment project? (Points : 3.7)
A. NPV=$11,124.28. Husky shall undertake the investment project since NPV>0.
B. NPV=-$19,579.80. Husky shall not undertake the investment project since NPV<0.
C. NPV=-$10,114.80. Husky shall not undertake the investment project since NPV<0.
D. NPV=$23,062.83. Husky shall undertake the investment project since NPV>0.
20. Husky Inc. is considering a capital expansion project. The initial investment of undertaking this project is $214,500. This expansion project will last for five years. The net operating cash flows from the expansion project at the end of year 1, 2, 3, 4 and 5 are estimated to be $50,850, $69,783, $71,332, $81,236 and $107,750 respectively.
Husky has a capital structure consisting of 60% debt and 40% equity. The after-tax cost of debt is 15% and the cost of equity is 37.50%.
Based on Huskyâs weighted average cost of capital calculated, what is the NPV of undertaking this expansion project? That is, what is the NPV if the weighted average cost of capital is used as the discount rate? Shall Husky undertake the investment project? (Points : 3.7)
A. NPV=$11,124.28. Husky shall undertake the investment project since NPV>0.
B. NPV=-$19,579.80. Husky shall not undertake the investment project since NPV<0.
C. NPV=-$10,114.80. Husky shall not undertake the investment project since NPV<0.
D. NPV=$23,062.83. Husky shall undertake the investment project since NPV>0.
Related questions
Propel Corporation plans to make a $ 49.5 millionâ investment, initially funded completely with debt. The free cash flows of the investment andâ Propel's incremental debt from the project are shownâ here:â
| Year | 0 | 1 | 2 | 3 |
| Free Cash flows ($ million) | -49.5 | 39.6 | 21.8 | 24.8 |
| Debt ($ million) | 49.5 | 31.6 | 13.9 | 0.0 |
Propel's incremental debt for the project will be paid off according to the predetermined schedule shown.â Propel's debt cost of capital is 7.4 %, and its tax rate is 35 %. Propel also estimates an unlevered cost of capital for the project of 12.6 %.
a. Use the APV method to determine the levered value of the project at each date and its initial NPV.
b. Calculate the WACC for this project at each date. How does the WACC change overâ time? Why?
c. Compute theâ project's NPV using the WACC method.
d. Compute the equity cost of capital for this project at each date. How does the equity cost of capital change overâ time? Why?
e. Compute theâ project's equity value using the FTE method. How does the initial equity value compare with the NPV calculated in parts (aâ) and â(câ)?
Hintâ: Make sure to round all intermediate calculations to at least four decimal places.
