Digital Organics (DO) has the opportunity to invest $1.13 million now (t = 0) and expects...

Digital Organics (DO) has the opportunity to invest $1.13 million now (t = 0) and expects after-tax returns of $710,000 in t = 1 and $810,000 in t = 2. The project will last for two years only. The appropriate cost of capital is 13% with all-equity financing, the borrowing rate is 9%, and DO will borrow $290,000 against the project. This debt must be repaid in two equal installments of $145,000 each. Assume debt tax shields have a net value of $.40 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.)

Adjusted present value $

Expert Solution


Calculation of Present value of Investment
cost of equity = 13%
		P.V.F. @ 13%	Present value
Cash flow at year 0	-1130000	1	-1130000
Cash flow at year 1	710000	0.8849557522	628318.5841
Cash flow at year 1	810000	0.7831466834	634348.8135

NPV =			132667.3976

Calculation of Present value of debt tax shield
cost of debt = borrowing rate * (1-t)
9%*(1-0.40) =	5.40%
	Principal remaining	Interest amount@9%	Tax shield = Int. * 0.40	P.V.F. @ 5.4	P.V.
Interest for 1 year	290000	26100	10440	0.9487666034	9905.12334
Interest for 2 year	145000	13050	5220	0.9001580678	4698.825114

Present value of debt tax shield					14603.94845

Adjusted present value = Net Present value with equity fiancing + Present value of Debt tax shield
132667.3976	14603.94845
147271.3461

So, Adjusted present value is $147271.35

Note : To calculate NPV, discount rate of equity shall be used.
To calculate present value of debt tax sheild, cost of debt shall be used.

jeff jeffy answered 1 year ago

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...

Digital Organics (DO) has the opportunity to invest $1.23 million now (t = 0) and expects...

Digital Organics (DO) has the opportunity to invest $1.23 million now (t = 0) and expects after-tax returns of $700,000 in t = 1 and $800,000 in t = 2. The project will last for two years only. The appropriate cost of capital is 12% with all-equity financing, the borrowing rate is 8%, and DO will borrow $200,000 against the project. This debt must be repaid in two equal installments of $100,000 each. Assume debt tax shields have a net...

You can invest in a risk-free technology that requires an upfront payment of $1.13 million and...

You can invest in a risk-free technology that requires an upfront payment of $1.13 million and will provide a perpetual annual cash flow of $115,000. Suppose all interest rates will be either 9.7% or 4.7% in one year and remain there forever. The risk-neutral probability that interest rates will drop to 4.7% is 93%. The one-year risk-free interest rate is 8.1%, and today's rate on a risk-free perpetual bond is 5.5%. The rate on an equivalent perpetual bond that is...

You have an opportunity to invest $107,000 now in return for $79,300 in one year and...

You have an opportunity to invest $107,000 now in return for $79,300 in one year and $29,200 in two years. If your cost of capital is 9.1%, what is the NPV of this investment?

ou have an opportunity to invest $ 110 000 now in return for $ 79 500...

ou have an opportunity to invest $ 110 000 now in return for $ 79 500 in one year and $ 29 700 in two years. If your cost of capital is 8.6 % , what is the NPV of this investment?

You have an opportunity to invest $51000 now in return for $601000 in one year. If...

You have an opportunity to invest $51000 now in return for $601000 in one year. If your cost of capital is 7.6%, what is the NPV of this investment?

You have an opportunity to invest $102000 now in return for $80200 in one year and...

You have an opportunity to invest $102000 now in return for $80200 in one year and $29400 in two years. If your cost of capital is 9.1% , what is the NPV of this investment?

You have an opportunity to invest $50,700 now in return for $59,300 in one year. If...

You have an opportunity to invest $50,700 now in return for $59,300 in one year. If your cost of capital is 8.3%, what is the NPV of this investment? The NPV will be (Round to the nearest cent.)

You have an opportunity to invest $103,000 now in return for $80,200 in one year and...

You have an opportunity to invest $103,000 now in return for $80,200 in one year and $29,300 in two years. If your cost of capital is 8.9%, what is the NPV of this investment? The NPV will be $____. (Round to the nearest cent)

Your company has an opportunity to invest in a project that is expected to result in...

Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $16,000 the first year, $18,000 the second year, $21,000 the third year, $24,000 the fourth year, $28,000 the fifth year, and $34,000 the sixth year. The project would cost the firm $72,000. If the firm's cost of capital is 12%, what is the modified internal rate of return? 18.17% 20.10% 15.71% 13.51% 16.66% You are evaluating a potential investment in...

Question