Digital Organics (DO) has the opportunity to invest $1.15 million now (t = 0) and expects...

Digital Organics (DO) has the opportunity to invest $1.15 million now (t = 0) and expects after-tax returns of $730,000 in t = 1 and $830,000 in t = 2. The project will last for two years only. The appropriate cost of capital is 11% with all-equity financing, the borrowing rate is 7%, and DO will borrow $270,000 against the project. This debt must be repaid in two equal installments of $135,000 each. Assume debt tax shields have a net value of $0.20 per dollar of interest paid. Calculate the project’s APV. (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations. Round your answer to the nearest whole number.)

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Expert Solution

Answer : Calculation of Project's APV :

Adjusted present Value = Present Value of Net Cash Flows + Present value of Interest Tax Shield

Present Value of Net Cash Flow = Present Value of Cash Inflow - Present Value of Cash outflow

Below is the table showing Present Value of Cash Inflow

Year	Cash Flows	PVF @11%	Present Value of Cash Flows

1	730000	0.900900901	657657.6577
2	830000	0.811622433	673646.6196
		Present Value of Cash Flows	1,331,304.277

Present Value of Net Cash Flow = 1,331,304.277 - 1,150,000

= 181,304.2773

Calculation of Present value of Interest Tax Shield :

Below is the table showing Calculation of Present value of Interest Tax Shield :

Year	Debt Amount	Interest	Interst tax Shield	PVF @11%	Present Value of Interest Tax Shield
		(Debt Amount * 7%)	(Interest * 0.2)
1	270000	18900	3780	0.900900901	3405.405405
2	135000	9450	1890	0.811622433	1533.966399
				Present Value of Interest Tax Shield	4939.371804

Adjusted present Value = Present Value of Net Cash Flows + Present value of Interest Tax Shield

Adjusted present Value = 181,304.2773 + 4939.371804

= 186,244

Note : PVF can be calculated as [1 / (1 + 0.11)^n] put n as 1 and 2

jeff jeffy answered 1 year ago

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