Question

Triad Corporation has established a joint venture with Tobacco Road Construction, Inc., to build a toll road in North Carolina. The initial investment in paving equipment is RM125 million. The equipment will be fully depreciated using the straight-line method over its economic life of 5 years. Earnings before interest, taxes, and depreciation collected from the toll road are projected to be RM18.4 million per annum for 20 years starting from the end of the first year. The corporate tax rate is 21 percent. The required rate of return for the project under all-equity financing is 13 percent. The pretax cost of debt for the joint partnership is 8.5 percent. To encourage investment in the country’s infrastructure, the U.S. government will subsidize the project with a RM40 million, 15-year loan at an interest rate of 5 percent per year. All principal will be repaid in one balloon payment at the end of Year 15. Calculate the adjusted present value of this project?

Answer 1

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