Purchase Solution

# Net present value (CC Cushions Company)

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CC Cushions Company is a pillow maker that is considering a new capital investment project that requires a \$40 million investment today. Next year, the project will generate expected pre-tax cash flows of \$2 million, all of which are taxable. The following year, expected cash flows will grow by 2.5%, and constant annual growth will continue forever. Assume that the project will always be backed by debt equal to 60% of the contemporaneous project value. The tax rate is 34%, debt will have a required return of 6%, and equity will have a required return of 9%.

What is the project net present value (NPV) according to the WACC method?

##### Solution Summary

Calculates the project net present value (NPV) according to the WACC method.

##### Solution Preview

Please see the **attached EXCEL** file for all the details.

CC Cushions Company is a pillow maker that is considering a new capital investment project that requires a \$40 million investment today. Next year, the project will generate expected pre-tax cash flows of \$2 million, all of which are taxable. The following year, expected cash flows will grow by 2.5%, and constant annual growth will continue forever. Assume that the project will always be backed by debt equal to 60% of the contemporaneous project value. The tax rate is 34%, debt will have a ...

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