Digital Organics (DO) has the opportunity to invest $1.23 million now (t = 0) and expects...

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Digital Organics (DO) has the opportunity to invest $1.23million now (t = 0) and expects after-tax returns of $700,000 in t= 1 and $800,000 in t = 2. The project will last for two yearsonly. The appropriate cost of capital is 12% with all-equityfinancing, the borrowing rate is 8%, and DO will borrow $200,000against the project. This debt must be repaid in two equalinstallments of $100,000 each. Assume debt tax shields have a netvalue of $.30 per dollar of interest paid. Calculate the project’sAPV. (Enter your answer in dollars, not millions of dollars. Do notround intermediate calculations. Round your answer to the nearestwhole number.) Adjusted present value

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3.8 Ratings (477 Votes)

Initial investment 123 million CF0 123 x 1000000 1230000 After tax return in year 1 CF1 700000 After tax return in year 2 CF2 800000 We know that APV of a project Base case NPV or NPV of a all equity project Present value of interest tax shields discounted at cost of debt Cost of of capital with all equity financing Unlevered cost of capital 12 Base Case NPV See Answer

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Digital Organics (DO) has the opportunity to invest $1.23million now (t = 0) and expects after-tax returns of $700,000 in t= 1 and $800,000 in t = 2. The project will last for two yearsonly. The appropriate cost of capital is 12% with all-equityfinancing, the borrowing rate is 8%, and DO will borrow $200,000against the project. This debt must be repaid in two equalinstallments of $100,000 each. Assume debt tax shields have a netvalue of $.30 per dollar of interest paid. Calculate the project’sAPV. (Enter your answer in dollars, not millions of dollars. Do notround intermediate calculations. Round your answer to the nearestwhole number.) Adjusted present value