Bossman, Inc. needs to purchase an equipment for $2.5 million. It is estimated that
the after-tax cash inflows from the project will be $300,000 annually in perpetuity.
Bossman has a market value debt-to-assets ratio of 40%. The firm's cost of equity is
13%, its pre-tax cost of debt is 8%, and the flotation costs of debt and equity are
2.5% and 7%, respectively. The tax rate is 30%. Assume the project is of similar risk
to the firm's existing operations. What is the NPV of the project for Bossman?
Answer:
A. -$45,937
B. $316,856
C. $488,048
D. $297,455
E. $350,917