Question
In: Finance
A project to produce rocker seats requires a $10 million investment. If the project is financed...
A project to produce rocker seats requires a $10 million investment. If the project is financed on an all equity basis, the after tax cash flows are $8 million for 10 years. The cost of unlevered equity for such a solar heater project is 12%. The firm intends to raise $5 million in debt financing that will be repaid in equal installments in 10 years. The interest rate on the debt is 8%. Is the project worthwhile? Use APV method.Tax rate can be ignored
Solutions
Expert Solution
Tax shield is not taken in to
consideration for Average Present Value Method.
If the tax benefit is taken in to consideration, the firm can proceed with this project. If the project is financed solely by equity, it will enjoy more cashflow. Were as the debt is used, the cash inflow is reduced, but still can go up with project.
jeff jeffy answered 2 months agoRelated Solutions
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$1.75 million per year for 10 years. The opportunity cost of
capital is 12%, which reflects the project’s business risk.
a. Suppose the project is financed with $5 million of debt and
$5 million of equity. The interest rate is 8% and the marginal tax
rate is 21%. The debt will be paid off in equal annual installments...
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Suppose the project is financed with $4 million of
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Case #4
APV
Consider a project to produce solar water heaters. It requires a
$10 million investment and offers a level after-tax cash flow of
$1.75 million per year for 10 years. The opportunity cost of
capital is 12%, which reflects the project’s business rick.
Suppose the project is financed with
$ 5 million of debt and $5 million of equity. The interest rate is
8% and the marginal tax rate is 35%. An equal amount of the debt
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the expected terminal value at the end of the project of $5
million. The cost of capital is 6 percent, and its marginal tax
rate is 40 percent. Calculate the profitability index of this
project.
0.84
0.09
1.70
1.34
1.09
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