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 $197 million. The equipment will be fully depreciated using the straight-line method over its economic life of five years. Earnings before interest, taxes, and depreciation collected from the toll road are projected to be $29.3 million per annum for 20 years starting from the end of the first year. The corporate tax rate is 23 percent. The required rate of return for the project under all-equity financing is 15 percent. The pretax cost of debt for the joint partnership is 8.7 percent. To encourage investment in the country’s infrastructure, the U.S. government will subsidize the project with a $130 million, 15-year loan at an interest rate of 5.2 percent per year. All principal will be repaid in one balloon payment at the end of Year 15.

What is the adjusted present value of this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

Answer 1

APV = NPV + PV of depreciation tax shield + PV of loan interest tax shield + PV of loan repayment

Part A - NPV
Initial investment	II	(197,000,000)
Annual cash flows	ACF	29,300,000
Discount rate	d	15%
Life	n	20
Tax rate	T	23%
After-tax cash flow	A = ACF*(1-T)	22,561,000.00
PV of after-tax cash flows	PV(d, n, A)	141,216,777.38
NPV	II + PV of after-tax cash flows	(55,783,222.62)

Part B - PV of depreciation tax shield
Initial investment	II	1,970,00,000
Economic life	n	5
Depreciation/year	D = II/L	39,400,000
Tax rate	T	23%
Depreciation tax shield	DT = D*T	9,062,000
Discount rate	d	15%
PV of dep. Tax shield	PV(d, n, DT)	30,377,229.50

Part C - PV of loan interest tax shield
Loan amount	L	1,300,00,000
Interest rate	r	5.20%
Annual interest payment	p = L*r	6,760,000
Tax rate	T	23%
Interest tax shield	IT = p*T	1,554,800
Life of loan	n	15
Discount rate	d	15%
PV of interest tax shield	PV(d,n,IT)	9,091,491.03

Part D - PV of loan repayment
Loan amount	L	1,300,00,000
Life	n	15
Discount rate	d	15%
Interest payment	PV(d,n,0,P)	6,760,000
PV of interest payment	I = PV(d,n,p)	39,528,221.87
PV of principal	P = PV(d,n,0,L)	15,976,283.08
PV of loan repayment	(L+I+P)	74,495,495.06

APV = (55,783,222.62) + 30,377,229.50 + 9,091,491.03 + 74,495,495.06 = 58,180,992.96