Problem:
National Electric Company (NEC) is considering a $45.03 million project in its power systems division. Tom Edison, the company's chief financial officer, has evaluated the project and determined that the project's unlevered cash flows will be $3.13 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. NEC's pretax cost of debt is 7.2 percent, and its cost of equity is 11.1 percent. The company's target debt-to-value ratio is 85 percent. The project has the same risk as NEC's existing businesses, and it will support the same amount of debt. NEC is in the 34 percent tax bracket.
Requirement:
Question 1: Calculate the weighted average cost of capital?
Question 2: Calculate the net present value of the project?
Note: Provide support for your underlying principle.