Problem 19-16 APV Digital Organics (DO) has the opportunity to invest $1.09 mill
ID: 2809942 • Letter: P
Question
Problem 19-16 APV Digital Organics (DO) has the opportunity to invest $1.09 million now (t-0) and expects after-tax returns of 690,000 in t = 1 and $790,000 in t = 2. The project will last for two years only. The appropriate cost of capital is 10% with all-equity financing, the borrowing rate is 6%, and DO will borrow $300,000 against the project. This debt must be repaid in two equal installments. Assume debt tax shields have a net value of 0.35 per dollar of interest paid. Calculate the project's APV.(Do not round intermediate calculations. Rounddown your answer to the nearest whole dollar) Adjusted present valueExplanation / Answer
The Adjusted present value= NPV ( project financed solely with equity capital) + PV of debt financing
As in the question ,
Invesment = $ 1090000
Cash inflow (t=1) = $ 690000
Cash inflow (t=2) = $ 790000
Cost of equity = 10%
Amount of debt = $ 390000
Cost of debt = 6%
Tax shield = 0.35.
NPV = (690000/ 1.10) +( 790000/ 1.10^ 2) -1090000 = 190165.289
PV of debt Finance = (390000 *6%*0.35) / 1.06 + ((390000 *6%*0.35) / 1.06^2) =15015.4859
APV = 190165.289 + 15015.4859 = $ 205180.7752