Question

change_of_status_fr... Changing to F-1/ F R myRutgers Portal R hent #4 Saved Triad Corporation has established a joint venture with Tobacco Road Construction, Inc., to build a toll road in North Carolina. The initial investment in paving equipment is $129 million. The equipment will be fully depreciated using the straight-line method over its economic life of five years. Earnings before interest, taxes, and depreciation collected from the toll road are projected to be $18.8 million per annum for 20 years starting from the end of the first year. The corporate tax rate is 21 percent. The required rate of return for the project under all-equity financing is 13 percent. The pretax cost of debt for the joint partnership is 7.9 percent. To encourage investment in the country's infrastructure, the U.S. government will subsidize the project with a $45 million, 15-year loan at an interest rate of 4.4 percent per year. All principal will be repaid in one balloon payment at the end of Year 15. What is the adjusted present value of this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) Adjusted present value

Answer 1

annual cash flow = $ 18.8 * (1- T) = 18.8 * 0.79 = $ 14.852 m

NPV= CF * PVIFA _{13%,20 years} - initial investment

= 14.852 * 7.0248 - 129 = 104.3323-129 = $ (24.6677 m)

PV of Depreciation tax shield ( S_d ) = 129 / 5 * 21 % * PVIFA _13%,5years

= 5.418 * 3.5172 = 19.0561896

PV of loan interest tax shield = 45 * 4.4% * 21% * PVIFA _{13%, 15 years} = 0.4158 * 6.46238 = $ 2.68705760

PV of loan repayment = 45- ( 45 * 4.4% * 6.45238) - 45 * PVIF_{13%,15 th year} = 45-12.7757124- 45* 0.1599

= 45- 12.7757124 - 7.1955

= $ 25.0287876

adjusted NPV = NPV + PV of depreciation tax sheild + PV of loan interest tax shield + PV of loan repayment

(24.6677)+ 19.0561896 + 2.68705760 + 25.0287876 = $ 22.1043348 m or $ 22104334.8