Question 1 Total 20 Marks A Ribbon Manufacture Ltd Is Considering A Project To Produce New Tech Sewing Machines Th 1 (94.8 KiB) Viewed 55 times
Question 1 Total 20 Marks A Ribbon Manufacture Ltd Is Considering A Project To Produce New Tech Sewing Machines Th 2 (9.74 KiB) Viewed 55 times
Question 1 (total 20 marks) (a). Ribbon Manufacture Ltd is considering a project to produce new-tech sewing machines. The project requires $6 million investment and offers after tax free cash flow (FCF) of $2,000,000 per year for 5 years. The unlevered opportunity cost of capital (ru) is 10% reflecting the project risk. Suppose the project is financed with $3 million of debt and $3 million of equity. Interest cost is 7% p.a. and the tax rate is 30%. The company will only make interest payment during the life of the project and will repay the total principal when the project terminates. (i) Calculate the unlevered value of the project (Vu, the value of the project without tax shield). (4 marks)
(ii) Calculate the value of the annual interest tax shield. (4 marks)
(iii) Calculate the adjusted present value (APV) of the project and recommend whether the company should accept the project. (6 marks)
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