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# Find the present value of the net cash flows

You are given the following net cash flows:

Year Net Cash Flow
______ ______________

0 \$ 0
1 \$ 1
2 \$ 2,000
3 \$ 2,000
4 \$ 2,000
5 \$ 0
6 (\$ 2,000) Negative number

The firm's debt to equity ratio is 60% and the firm has \$600,000 in debt. The cost of debt is 10% on the first \$450,000 of debt and 18% on the remaining debt. Cost of equity is 14.88% and the tax rate is 40%.

Given the information present above, please find the present value of the net cash flows.

W-A-C-C = WdKd(1-t) + WpsKps + WcsKcs (see below for calculations)
.6(.12)(1-.4) + 0 + .4(.1488)
4.32 + 0 + 5.95
10.27 Required rate of return

Debt = 40%
Equity = 60%

Debt = \$600,000 -> \$450,000 * 10% = \$45,000
\$150,000 * 18% = \$27,000
Total = \$72,000

Cost of Debt \$72,000 / \$600,000 = 12%

Cost of Equity = 14.88%

NPV = NCF0 + NCF1 + NCF2 .... NCF6
_____ _____ _____
(1+r)^1 (1+r)^2 (1+r)6

= \$0 + \$1 + \$2,000 + \$2,000 + \$2,000 + \$0 + (\$2,000)
______ ________ ________ ________ ______ _________
(1.1027) (1.1027)^2 (1.1027)^3 (1.1027)^4 (1.1027)^5(1.1027)^6

= \$0 + \$.90 + \$1,644.80 + \$1,491.61 + \$1,352.70 + \$0 + (\$1,112.46)