Use the adjusted present value approach

Assignment Help Financial Management

Reference no: EM131934614

Consider a project to produce solar water heaters. It requires a $10 million investment and offers a level after-tax cash flow of $1.75 million per year for 10 years. The opportunity cost of capital is 12%, which reflects the project’s business risk. Assume that the project is financed with $5 million of debt and $5 million of equity. The interest rate is 8% and the marginal tax rate is 35%. The debt will be paid off in equal annual installments over the project’s 10-year life.

Required: (a) Calculate the Adjusted Present Value (APV).

(b) How does APV change if the firm incurs issue costs of $400,000 to raise the $5 million of required equity?

(c) Assuming that the solar water heaters project has a NPV, when all equity financing, of $500,000. To finance the project, $10 million in debt is issued with associated flotation costs of $200,000. For tax purposes, the flotation costs has to be amortized over the project's 10 year life. The debt is issued at 10% interest with the repayment of principal due in a lump sum at the end of the tenth year. As stated above, the firm's tax rate is 35%. Calculate the project's APV.

(d) Under what circumstances would it be better to use the Adjusted Present Value approach?

Reference no: EM131934614

Questions Cloud

General partner of limited liability partnership : Which of the following is true of a general partner of a limited liability partnership (LLP)? Revenue bonds are used to.

Demonstrate understanding of economic analytical techniques : Introduction to Economics (QB 1502) - discuss the nature of the relationship between employers and employees and evaluate employment factors in the economy

Draw the picture for the conceptual model : Describe the topic you have selected so it is clear what you are analyzing. The current status of the topic should explained .

Limitations of using measures of physical scarcity : What are the limitations of using measures of physical scarcity such as the "exponential exhaustion index" that was developed by the Meadows

Use the adjusted present value approach : Calculate the Adjusted Present Value (APV). Under what circumstances would it be better to use the Adjusted Present Value approach?

How has the market for french wines been affected : a) How has the market for French wines been affected by the poor harvest?

Write one page after-feeling essay : Write one page after-feeling essay, 275 words is enough, check the file, i insert my photo from museum. What you see? what is your feeling? something like that.

Design a database schema and a set of front-end programs : Your task for this assignment is to design a database schema and a set of front-end programs for a student registration database

Production function aid in management decisions : Assume you are the manager of a small coffee shop. How would knowledge of your production function aid in your management decisions?

User Account

All Pages