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2. Asian Paper Company is considering a new linerboard machine costing Rs 2 million. It is expected to produce after-tax savings of Rs 400,000 per year for eight years. The required rate of return on unlevered equity is 13 percent. To an all-equity-financed firm it is the policy of the company to finance capital investment projects with 50 percent debt, because that is the target debt to total capitalization of the company Asian Paper Company is able to borrow Rs 1 million at 10 percent interest to finance part of the new machine. (The balance will come from equity funds.) The principal amount of the loan will be repaid in equal year-end instalments of Rs 125,000 through Scanned by CamScann the end of the eighth year. (In this way the amount borrowed declines over time along with, we would assume, the value of the depreciating asset.) If the company's tax rate equals 40 percent. Calculate the NPV and adjusted net present value. After assuming that floatation cost is Rs 12,000. Also prepare the debt repayments schedule. 10 Or Keerthinath Corporation presently has two million outstanding equity shares (Rs.10 par) selling at Rs.11 per share and no outstanding debt It needs Rs.8 million of additional funds which can be raised in two ways: (a) issue of 0.8 million equity shares at Rs.10 per share, (b) issue of debt capital carrying 14 percent interest. The expected earnings before interest and taxes after the new funds are raised will be Rs.6 million per year with a standard deviation of Rs.2 million. Keerthinath Corporation's tax rate is 35 percent. What is the probability that the debt alternative is better than the equity alternative with respect to earnings per share. 10

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