Reference no: EM132524086

The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years and annual interest payments. The interest rate for debt is 10%. The equipment will be depreciated straight-line to zero over the 5-year life of the project. There will be a pre-tax salvage value of $5,000. There are no other start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs. The tax rate for the firm is 34%. The shareholders unlevered required rate of return is (Ku) is 15%.

i) When using the APV methodology, what is the NPV of the depreciation tax shield?

ii) When using the APV methodology, what is the NPV of the interest tax shield?

iii) What is the NPV of the project using the APV methodology?