Ottawa Construction Limited is considering an investment in new manufacturing equipment. The equipment costs $200,000.00 and will provide annual aftertax inflows of $45000 at the end of each of the next 6 years. The firm’s market value debt/equity ratio is 150%, its cost of equity is 13%, and its pretax cost of debt is 7%. The flotation costs of debt and equity are 4% and 7%, respectively. The firm’s combined marginal federal and provincial tax rate is 35%. Assume the project is of approximately the same risk as the firm’s existing operations.
a) What is the weighted average cost of capital for Ottawa Construction Limited?
b) Ignoring flotation costs, what is the NPV of the proposed project?
c) What is the weighted average flotation cost for Ottawa Construction Limited?
d) What is the dollar flotation cost for the proposed financing?
e) After considering flotation costs, what is the NPV of the proposed project?