Knotts, Inc., an all-equity firm, is considering an investment of $1.71 million that will be depreciated...

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Knotts, Inc., an all-equity firm, is considering an investmentof $1.71 million that will be depreciated according to thestraight-line method over its four-year life. The project isexpected to generate earnings before taxes and depreciation of$604,000 per year for four years. The investment will not changethe risk level of the firm. The company can obtain a four-year, 8.4percent loan to finance the project from a local bank. Allprincipal will be repaid in one balloon payment at the end of thefourth year. The bank will charge the firm $54,000 in flotationfees, which will be amortized over the four-year life of the loan.If the company financed the project entirely with equity, thefirm’s cost of capital would be 14 percent. The corporate tax rateis 23 percent.

Using the adjusted present value method, calculate the APV ofthe project.

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Knotts, Inc., an all-equity firm, is considering an investmentof $1.71 million that will be depreciated according to thestraight-line method over its four-year life. The project isexpected to generate earnings before taxes and depreciation of$604,000 per year for four years. The investment will not changethe risk level of the firm. The company can obtain a four-year, 8.4percent loan to finance the project from a local bank. Allprincipal will be repaid in one balloon payment at the end of thefourth year. The bank will charge the firm $54,000 in flotationfees, which will be amortized over the four-year life of the loan.If the company financed the project entirely with equity, thefirm’s cost of capital would be 14 percent. The corporate tax rateis 23 percent. Using the adjusted present value method, calculate the APV ofthe project.