Consider a project to produce solar water heaters. It requires a $10 million investment and offers...

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Finance

Consider a project to produce solar water heaters. It requires a$10 million investment and offers a level after-tax cash flow of$1.56 million per year for 10 years. The opportunity cost ofcapital is 9.25%, which reflects the project's business risk.
Suppose the project is financed with $4 million ofdebt and $6 million of equity. The interest rate is 5.25% and themarginal tax rate is 21%. An equal amount of the debt will berepaid in each year of the project's life.
a. Calculate APV. (Enter your answer in dollars, notmillions of dollars. Do not round intermediate calculations. Roundyour answer to the nearest whole number.)
b. If the firm incurs issue costs of $730,000 toraise the $6 million of required equity, what will be theAPV? (Enter your answer in dollars, notmillions of dollars. Do not round intermediatecalculations. Round your answer to the nearestwhole number. Negative amount should be indicated by a minussign.)

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3.9 Ratings (559 Votes)

aAPV NPV present value of interest tax shieldNPV 10 million 156 million PVAF925 12 wherePVAF See Answer

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Consider a project to produce solar water heaters. It requires a$10 million investment and offers a level after-tax cash flow of$1.56 million per year for 10 years. The opportunity cost ofcapital is 9.25%, which reflects the project's business risk.Suppose the project is financed with $4 million ofdebt and $6 million of equity. The interest rate is 5.25% and themarginal tax rate is 21%. An equal amount of the debt will berepaid in each year of the project's life.a. Calculate APV. (Enter your answer in dollars, notmillions of dollars. Do not round intermediate calculations. Roundyour answer to the nearest whole number.)b. If the firm incurs issue costs of $730,000 toraise the $6 million of required equity, what will be theAPV? (Enter your answer in dollars, notmillions of dollars. Do not round intermediatecalculations. Round your answer to the nearestwhole number. Negative amount should be indicated by a minussign.)