[Anonymous]

New to accounting looking for some help understanding this problem

A firm is considering growing its product line. project will last 3 years and have an initial

investment of $100,000. The after-tax cash flows are estimated at $80,000 for year one, and $135,000 for year 2 and 3,

The firm has a target debt-to-equity ratio of 40 percent.

The project cost of equity is 14 percent and its cost of debt is 7 percent.

The tax rate is 34 percent.

Should the firm invest in this project?

Below is the formula

WACC = (E/V * Re) + D/V* Rd * (1 – Tc)

I appreciate any help!

Kevin

[ohiostategirlcpa]

You use the WACC to find the hurdle/discount rate for the project.

Than you use the discount rate to calculate the NPV (Net present value) of the project.

If NPV is positive then invest in it.

This forum is not to help you with your homework. Also, most members/CPA students first show their work, then ask questions “what am I doing wrong”? This is because submitting someone else's answers is not allowed on the CPA exam.

Also,these problems are more CMA than CPA because CMA allows financial calculators whereas CPA test does not.

F91 A95 R90 B94
CMA since 2015
(Gleim books/PDFs, MCQs, SIMS)

[monikernc]

kevin, that looks like a BEC problem and you can post it to the BEC Study group from the home page of the forum. i assure you one purpose of the forum is to post questions you need help with as you study for the CPA exam.

there is a no drama rule. all forum participants can find the rules on the home page, too. the usual and expected tone is one of pleasant respect.

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[Anonymous]

Thank you for the feedback, I will be more diligent next time and make sure I follow the forum rules…

Kevin

[Author]

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