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Homework answers / question archive / A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0)

A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0)

Finance

A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0). (A negative answer should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars.) 
a. If the firm invests, it has to raise $640,000 by a stock issue. Issue costs are 18.03% of net proceeds. What is the project's APV? 
Adjusted present value 
1 
b. If the firm invests, there are no issue costs, but its debt capacity increases by $640,000. The present value of interest tax shields on this debt is $90,000. What is the project's APV? 
Adjusted present value 
 

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(i) Computation of Project's Adjusted Present Value (APV):

Adjusted Present Value (APV) = Base Case NPV - Sum of  PVs of Financial Side Effects 

= 0 - ($640,000 * 18.03%)

Adjusted Present Value (APV) = -$115,392

 

(ii) Computation of Project's Adjusted Present Value (APV):

Adjusted Present Value (APV) = Base Case NPV + PV (Interest Tax Shield)

=  0 + $90,000 

Adjusted Present Value (APV) = $90,000

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