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 r_D = 0.10, and the tax shield per dollar of interest is T_c = 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	=10000.10.21/0.24	[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	=D81.10.21/1.24
	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 4 months ago

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