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Question
Digital Organics (DO) has the opportunity to invest $1.08 million now (t = 0) and expects after-tax returns of $680,000 in t = 1 and $780,000 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 $380,000 against the project. This debt must be repaid in two equal installments of $190,000 each. Assume debt tax shields have a net value of $.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.)
explain why the short-term project might be higher ranked under the NPV criterion if the cost of capital is high; whereas, the long-term project might be deemed better if the cost of capital is low.
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