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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). (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
Expert Solution
(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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