A firm is considering a project that will last five years and will generate an annual cash flow of $9 million. The project requires an initial investment of $28 million. Assume that the cost of equity for the project is 20% if the project is 100 percent equity financed. The firm can obtain a loan for $22.5 million to start the project, at a rate of 10 percent ($2.25 million in interest paid each year, with principal paid in a lump sum at the end of the loan). However, the lender will only extend the loan for three years. The firm's tax rate is 30 percent. Calculate the APV of the project. Is this investment worthwhile for the firm?
A firm is considering a project that will last five years and will generate an annual cash flow of $9 million. The project requires an initial investment of $28 million. Assume that the cost of equity for the project is 20% if the project is 100 percent equity financed. The firm can obtain a loan for $22.5 million to start the project, at a rate of 10 percent ($2.25 million in interest paid each year, with principal paid in a lump sum at the end of the loan). However, the lender will only extend the loan for three years. The firm's tax rate is 30 percent. Calculate the APV of the project. Is this investment worthwhile for the firm?
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 2PB: Markoff Products is considering two competing projects, but only one will be selected. Project A...
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A firm is considering a project that will last five years and will generate an annual cash flow of $9 million. The project requires an initial investment of $28 million. Assume that the
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