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.


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