Question

MVP, Inc., has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 45 percent and the tax rate is 22 percent. The required return on the firm's levered equity is 14 percent. The company is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: 0.5 points Year Cash Flow -$18.800,000 0 eBook 5,780.000 9.580.000 8.880.000 Print References The company has arranged a debt issue of $9.54 million to partially finance the expansion. Under the loan, the company would pay Interest of 8 percent at the end of each year on the outstanding balance at the beginning of the year. The company also would make year-end principal payments of $3.180.000 per year, completely retiring the Issue by the end of the third year. Calculate the APV of the 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) APV

Answer 1

Principal repayment After tax interest payment Total Year Debt outstanding 0 $ 9,540,000 1 $ 6,360,000 2 $ 3,180,000 3 $ $ $ 3,180,000 3,180,000 3,180,000 $ $ $ 595,296 396,864 198,432 $ 3,775,296 $ 3,576,864 $ 3,378,432

Year Cash flow [email protected]% Present value 0 $ (18,800,000) 1 $ 5,780,000 2 $ 9,580,000 3 $ 8,880,000 1.000 $ 0.889 $ 0.791 $ 0.703 $ (18,800,000.00) 5,140,466.60 7,577,307.56 6,246,504.76 NPV $ 164,278.91 Unlevered cost of equity 12.44% =(14%+8%*(1-22%)*0.45)/(1+0.45*(1-22%)) Year Cash flow PVIF@8% Present value 0 $ 1 $ 2 $ 31 $ 9,540,000 (3,775,296) (3,576,864) (3,378,432) 1.000 $ 0.926 $ 0.857 $ 0.794 $ 9,540,000.00 (3,495,644.44) (3,066,584.36) (2,681,908.25) NPV financing side affect 295,862.95 Adjusted NPV (APV) $ 460,141.86 =164278.91+295862.95

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