Suppose you have a project with a projected annual cash flow before interest and taxes of...

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Finance

Suppose you have a project with a projected annual cash flowbefore interest and taxes of $6 million, indefinitely. The initialinvestment of $18 million will be financed with 60% equity and 40%debt. Your tax rate is 34%, your cost of capital if you were anall-equity firm is 24%, and your usual borrowing rate is 10%. Yourproject has been reviewed by your local city government and hasbeen selected to receive municipal funding at a rate of 8%. Therewill, however, be a flotation cost to this debt of $500,000, whichmust be expensed immediately and will be paid from the grossproceeds of your debt. Using APV, determine whether to approve thisproject or not.

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4.2 Ratings (757 Votes)

1 In Adjusted Price Value APV method we first estimate the present value of the project by discounting it at the rate of cost of equity assuming it to be without any leverage 2 In the next step we calculate the present See Answer

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Transcribed Image Text

Suppose you have a project with a projected annual cash flowbefore interest and taxes of $6 million, indefinitely. The initialinvestment of $18 million will be financed with 60% equity and 40%debt. Your tax rate is 34%, your cost of capital if you were anall-equity firm is 24%, and your usual borrowing rate is 10%. Yourproject has been reviewed by your local city government and hasbeen selected to receive municipal funding at a rate of 8%. Therewill, however, be a flotation cost to this debt of $500,000, whichmust be expensed immediately and will be paid from the grossproceeds of your debt. Using APV, determine whether to approve thisproject or not.