Question

Check my work Consider a project lasting one year only. The initial outlay is $1,000 and the expected inflow is $1,220. The opportunity cost of capital is r= 0.22. The borrowing rate is rp = 0.09, and the tax shield per dollar of interest is Tc = 0.21. (Do not round intermediate calculations. Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required.) 10 points a. What is the project's base-case NPV? eBook Base-case NPV Print References b. What is its APV if the firm borrows 27% of the project's required investment? Adjusted present value

Answer 1

Given,

Initial outlay = $ 1000

Expected inflow = $ 1220

Opportunity cost of capital (r) = 0.22

Borrowing rate (r_D) = 0.09

Tax rate (T_c) = 0.21

Solution :-

base-case NPU - Expected Inflow I to – initial Outlay - $ 1000 $ 1220 +0.22 $1220 1.22 $1000 $1000 - $ 1000 $0 (6) Amount borrowed = $ 1000 x 27% - $270 Interest - Amount borrowed & do $ 270 x 0,09= $24.30 PV of interest tax shield - Interest & Tc. It OD

- $24.30 × 0.21 + 0.09 $5.103 1.09 = $ 4.68 رحنا No APV = base-case NPV + PU of interest tax Shield = $0+ $4.68 = $ 4.68