(12 pts) 3. An all-equity firm is considering a $10,000,000 investment that will be depreciated according to the straigh

[answerhappygod]

12 Pts 3 An All Equity Firm Is Considering A 10 000 000 Investment That Will Be Depreciated According To The Straigh 1 (71.09 KiB) Viewed 92 times

(12 pts) 3. An all-equity firm is considering a $10,000,000 investment that will be depreciated according to the straight-line method to zero over its four-year life. The project is expected to generate earnings before taxes and depreciation (EBTD) of $4,000,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 8 percent loan to finance the project from a local financial institution. Assume that the firm will borrow $7,500,000. Interests will be paid every year but all principal will be repaid in one balloon payment at the end of fourth year. The bank will charge the firm $100,000 in flotation fees, which will be amortized over the four-year life of the loan. Depreciation and amortization expenses are tax-deductible. If the company financed the project entirely with equity, the firm's cost of capital would be 15 percent. The corporate tax rate is 25 percent. The project does not require net working capital investment and has no salvage value. Find the adjusted present value (APV) of the project. Should the company accept the project?