You are evaluating a project that requires an investment of $95 today and guarantees a single cash flow of $116 one ye
Posted: Sun Jul 03, 2022 12:54 pm
You are evaluating a project that requires an investment of $95today and guarantees a single cash flow of $116 one year from now.You decide to use
100% debt financing, that is, you will borrow $95.The risk-free rate is 5% and the tax rate is 38%. Assume thatthe investment is fully depreciated at the end of the year,so without leverage, you would owe taxes on the difference betweenthe project cash flow and the investment, that is,$21.
a. Calculate the NPV of this investment opportunity using theAPV method.
b. Using your answer to part (a), calculate the WACC of theproject.
c. Verify that you get the same answer using the WACC method tocalculate NPV.
d. Finally, show that flow-to-equity method alsocorrectly gives the NPV of this investment opportunity.
100% debt financing, that is, you will borrow $95.The risk-free rate is 5% and the tax rate is 38%. Assume thatthe investment is fully depreciated at the end of the year,so without leverage, you would owe taxes on the difference betweenthe project cash flow and the investment, that is,$21.
a. Calculate the NPV of this investment opportunity using theAPV method.
b. Using your answer to part (a), calculate the WACC of theproject.
c. Verify that you get the same answer using the WACC method tocalculate NPV.
d. Finally, show that flow-to-equity method alsocorrectly gives the NPV of this investment opportunity.