In: Finance
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?
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 |