Explore BrainMass

# Cost of Capital and Net Present Value (NPV)

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

I have a few problems to work on for my practice class. Please show me your steps to the solution/formulas use. Thank you.

Problem #1

The market value of Charcoal Corporation's common stock is 20 million, and the market value of its risk-free debt is \$5 million. The beta of the company's common stock is 1.25, and the market risk premium is 8%. If the treasury bill rate is 5%, what is the company's cost of capital. (Assume no taxes.)

Problem #2

A project requires an initial investment in equipement of \$90,000 and then requires an investment in working capital of \$10,000 at the beginning (t=0). The project is expected to produce sales revenues of \$120,000 for each of the three years. Manufacturing costs are estimated to be 60% of revenues. The assets are depreciated using straight-line depreciation without any salvage value. At the end of the project, the firm can sell the equipment for \$10,000. The corporate tax rate is 30% and the cost of capital is 15%.

Calculate the NPV of the project.