Let's say I buy a truck with 70% debt and 30% cash. I want to find the NPV of this project; what discount rate should I use? I know I would use a WACC, and use the cost of debt, but would I also use the cost of cash? What would the cost of cash be? I assume there is no cost of equity right?
| +379 | What to expect during your IB summer internship and how to secure the full-time offer | 23 | 1d | |
| +186 | MD Can’t Unplug | 48 | 4h | |
| +180 | 2nd casualty of BofA, 25 yo credit trader | 58 | 8h | |
| Am I insane? (NEED ADVICE) | 59 | 7h | ||
| +74 | Associates not checking my work and getting mad at me? | 18 | 38m | |
| +64 | BofA Assoc who died had sought to leave, citing long hours | 16 | 3d | |
| +62 | How Much Parental Assistance Do People Actually Have? | 21 | 9h | |
| +41 | How is Northwestern? | 7 | 1d | |
| +39 | Another BofA trader died? This is insane... | 24 | 3d | |
| +33 | the new "email template" | 11 | 2h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
For cash you can use cash equivalents so it'd be fair to use a 90 day treasury of ~2.3%.
Why would there be no cost of equity? Are there no risks associated with owning the truck? Could you not invest the money in any other way other than put it in the bank?
ok maybe i don't understand what cost of equity is. I thought you only have cost of equity if you issue stocks to buy it? lol idk
IN this situation, is the cost of equity just the cost of equity for the entire company that is buying the truck?
30% cash is your “equity” in the truck.
Cost of equity is the rate of return you should receiving if you had invested the cash anywhere else.
Okay, what if I paid for the truck 100% with debt, what would my wacc be?
Then it would only be the cost of debt.
Let's say your cost of debt is 10 % and tax level is 20 %. Cost of debt: 10% * (1-0,2) = 8 % Since you fund the truck with only debt the whole equity part of the equation equals to zero. Ie:
WACC = 0 % cost of equity + 100% cost of debt = 0 + (100% * 8%) = 8%
Are you sure? You just ignore the company's overall wacc?
You should treat the cash as equity.
Aut qui eum debitis inventore magni odio ducimus. Et beatae tenetur sapiente at. Aut qui qui error quibusdam totam. Hic ut ipsum dolore et. Beatae reprehenderit aspernatur officiis possimus ut et perspiciatis.
Autem et adipisci iste. Totam porro rerum soluta laudantium. Eos natus architecto beatae rem minima dolorem recusandae. Molestiae voluptatem enim nisi perspiciatis.
Maiores iusto itaque alias velit ullam nostrum. Nobis architecto quaerat repellat voluptate esse. Quia consectetur quibusdam sit aut ea voluptatum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...