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Industries is considering investing $55 million into a new project
Industries is considering investing $55 million into a new project. The projected free cash flows from the project are shown in the table below. In order to finance the project, Bore will issue a 5-year bond with a face value of $80 million that will be repaid in one bullet payment at the end of five years (as shown in the table below). The cost of debt on the bond is 4.5%, Bore's unlevered cost of capital is 12%, and its marginal corporate tax rate is 25%. Using the APV method, what is the NPV of the project? (Select one) 4 Free Cash Flows for New Project (in $ million) Year o 1 2 3 FCF (in $ millions) (55.00) 15.00 30.00 50.00 Debt Level (in $ millions) 80 80 80 80 10.00 5.00 80 0 $31.04 million $27.09 million $82.1 million $87 million
Expert Solution
answer = $31.04M
NPV (APV method) = NPV of FCF discounted at Ke+ NPV of Tax shields discounted at Kd
tax shield = Interest * tax rate
= 80 *4.5% *25%
=0.9M
This 0.9M willbe discounted at costof deb 4.5% and the FCF will be discounted at cost of equity 12%
NPV is computed for above stream of CF at respective discount rates using NPV function,
please see the attahced file.
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