You are evaluating a project that requires an investment of $102 today and garantees a single cash flow of $127 one year from now. You decide to use 100% debt financing, that is, you will borrow $102. The risk-free rate is 5% and the tax rate is 39%. Assume that the investment is fully depreciated at the end of the year, so without leverage you would owe taxes on the difference between the project cash flow and the investment, that is, $25. Calculate the NPV of this investment opportunity using the APV method. (Round to two decimalplaces.) Using your answer to part (1), calculate the WACC of the project. (Round to two decimalplaces.) Verify that you get the same answer using the WACC method to calculate NPV. (Round to two decimalplaces.) Finally, show that flow-to-equity method also correctly gives the NPV of this investment opportunity. (Round to two decimalplaces.)
You are evaluating a project that requires an investment of $102 today and garantees a single cash flow of $127 one year from now. You decide to use 100% debt financing, that is, you will borrow $102. The risk-free rate is 5% and the tax rate is 39%. Assume that the investment is fully depreciated at the end of the year, so without leverage you would owe taxes on the difference between the project cash flow and the investment, that is, $25. Calculate the NPV of this investment opportunity using the APV method. (Round to two decimalplaces.) Using your answer to part (1), calculate the WACC of the project. (Round to two decimalplaces.) Verify that you get the same answer using the WACC method to calculate NPV. (Round to two decimalplaces.) Finally, show that flow-to-equity method also correctly gives the NPV of this investment opportunity. (Round to two decimalplaces.)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 13E: Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a...
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You are evaluating a project that requires an investment of $102 today and garantees a single cash flow of $127 one year from now. You decide to use 100% debt financing, that is, you will borrow $102. The risk-free rate is 5% and the tax rate is 39%. Assume that the investment is fully depreciated at the end of the year, so without leverage you would owe taxes on the difference between the project cash flow and the investment, that is, $25.
- Calculate the
NPV of this investment opportunity using the APV method. (Round to two decimalplaces.) - Using your answer to part (1), calculate the WACC of the project. (Round to two decimalplaces.)
- Verify that you get the same answer using the WACC method to calculate NPV. (Round to two decimalplaces.)
- Finally, show that flow-to-equity method also correctly gives the NPV of this investment opportunity. (Round to two decimalplaces.)
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