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

Consider a project lasting one year only. The initial outlay is $1,000 and the expected inflow is $1,240. The opportunity cost of capital is r = 0.24. The borrowing rate is rD = 0.10, and the tax shield per dollar of interest is Tc = 0.21. ( Do not round intermediate calculations. Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required.)

a. What is the project’s base-case NPV?

b. What is its APV if the firm borrows 35% of the project’s required investment?

Solutions

Expert Solution

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 =1000*0.1*0.21/0.24 [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 =D8*1.1*0.21/1.24
APV if firm borrow 35% through Debt     186.55 =D2/1.1-D3+D9/1.1 PV of Expected Inflow - Initial Outley + Debt Shield

jeff jeffy answered 10 months ago
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