Consider a project lasting one year only. The initial outlay is $1,000 and the expected inflow...

Free

60.1K

Verified Solution

Question

Finance

Consider a project lasting one year only. The initial outlay is$1,000 and the expected inflow is $1,240. The opportunity cost ofcapital is r = 0.24. The borrowing rate isr_D = 0.10, and the tax shield per dollar ofinterest is T_c = 0.21. ( Do not roundintermediate calculations. Round your answers to 2 decimal places.Leave no cells blank - be certain to enter "0" whereverrequired.)

a. What is the project’s base-case NPV?
b. What is its APV if the firm borrows 35% ofthe project’s required investment?

Answer & Explanation Solved by verified expert

3.8 Ratings (643 Votes)

	Particulars	Amount	Formula	Formula
	Expected Inflow	1,240.00	1,240.00
	Initial Outley	1,000.00	1,000.00
	Debt Shield (Benefits of Debt in Financing)	87.50	=10000.10.21/0.24	[Initial Outley Debt Interest Rate Tax Shield/Opportunity Cost of equity]
a.	Project Base Case NPV	206.82	=(D2/1.1)-D3+D4/1.1	PV of Expected Inflow - Initial Outley + Debt Shield

b.	APV if firm borrow 35% through Debt
	Debt funds (35% of total)	350.00	=D3*0.35
	Debt Shield (Tax Shield)	65.20	=D81.10.21/1.24
	APV if firm borrow 35% through Debt	186.55	=D2/1.1-D3+D9/1.1	PV of Expected Inflow - Initial Outley + Debt Shield

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Consider a project lasting one year only. The initial outlay is$1,000 and the expected inflow is $1,240. The opportunity cost ofcapital is r = 0.24. The borrowing rate isrD = 0.10, and the tax shield per dollar ofinterest is Tc = 0.21. ( Do not roundintermediate calculations. Round your answers to 2 decimal places.Leave no cells blank - be certain to enter "0" whereverrequired.)a. What is the project’s base-case NPV?b. What is its APV if the firm borrows 35% ofthe project’s required investment?