NPV Calculation with Risk Adjustment: Dyrdek Enterprises Project Evaluation

To\u0020calculate\u0020the\u0020project's\u0020NPV,\u0020we\u0020need\u0020to\u0020discount\u0020the\u0020cash\u0020flows\u0020using\u0020the\u0020appropriate\u0020discount\u0020rate.\u0020Since\u0020the\u0020project\u0020has\u0020higher\u0020risk\u0020than\u0020the\u0020firm,\u0020a\u0020risk\u0020adjustment\u0020factor\u0020of\u002014%\u0020will\u0020be\u0020added\u0020to\u0020the\u0020cost\u0020of\u0020equity.\n\nCost\u0020of\u0020equity\u0020=\u002010.99%\u0020+\u002014%\u0020=\u002024.99%\n\nThe\u0020after-tax\u0020cost\u0020of\u0020debt\u0020is\u0020calculated\u0020as\u0020follows:\nAfter-tax\u0020cost\u0020of\u0020debt\u0020=\u0020Pretax\u0020cost\u0020of\u0020debt\u0020*\u0020(1\u0020-\u0020Tax\u0020rate)\n=\u00204.86%\u0020*\u0020(1\u0020-\u00200.35)\n=\u00203.16%\n\nNow,\u0020let's\u0020calculate\u0020the\u0020discounted\u0020cash\u0020flows\u0020for\u0020the\u0020project:\n\nYear\u00201:\u0020$566,000\u0020/\u0020(1\u0020+\u002024.99%)\u0020=\u0020$566,000\u0020/\u00201.2499\u0020=\u0020$452,022.42\nYear\u00202:\u0020$566,000\u0020/\u0020(1\u0020+\u002024.99%)^2\u0020=\u0020$566,000\u0020/\u00201.5624\u0020=\u0020$362,091.74\nYear\u00203:\u0020$566,000\u0020/\u0020(1\u0020+\u002024.99%)^3\u0020=\u0020$566,000\u0020/\u00201.9483\u0020=\u0020$290,727.89\nYear\u00204:\u0020$566,000\u0020/\u0020(1\u0020+\u002024.99%)^4\u0020=\u0020$566,000\u0020/\u00202.4209\u0020=\u0020$233,669.26\nYear\u00205:\u0020$566,000\u0020/\u0020(1\u0020+\u002024.99%)^5\u0020=\u0020$566,000\u0020/\u00203.0157\u0020=\u0020$187,843.85\nYear\u00206:\u0020$566,000\u0020/\u0020(1\u0020+\u002024.99%)^6\u0020=\u0020$566,000\u0020/\u00203.7516\u0020=\u0020$151,022.36\n\nNow,\u0020let's\u0020calculate\u0020the\u0020NPV\u0020by\u0020summing\u0020up\u0020the\u0020discounted\u0020cash\u0020flows\u0020and\u0020subtracting\u0020the\u0020initial\u0020investment:\n\nNPV\u0020=\u0020-$216,000,000\u0020+\u0020$452,022.42\u0020+\u0020$362,091.74\u0020+\u0020$290,727.89\u0020+\u0020$233,669.26\u0020+\u0020$187,843.85\u0020+\u0020$151,022.36\n=\u0020-$216,000,000\u0020+\u0020$1,677,377.52\n=\u0020$1,461,377.52\n\nTherefore,\u0020the\u0020project's\u0020NPV\u0020is\u0020$1,461,377.52.