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 21 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:

  

Year	Cash Flow
0	−$18,200,000
1	5,720,000
2	9,520,000
3	8,820,000

  

The company has arranged a debt issue of $9.36 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 $3,120,000 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)

Answer 1

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Home ert Page Layout Formulas Data Review V Add-Ins 義Cut aCopy Format Painter 11 Arap Text Fill В า 프. m. d..Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛 Paste Conditional Format C Insert Delete Format Formatting as Table Styles Sort &Find & ClearFilter Select Clipboard Font Alignment Cells dting Formula Bar FR FS FT FU FV FW FX FZ GA GB GC GD GE 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 MVP STEP 1 CALCULATE UNLEVERED COST OF EQUITY Rs RO(D/S)(RO-Rb)(1-t) 14%-R0 + (0.45)(RO-896)(1-021) 1496-RO +0.3555 RO-2.844% 16.844%-1.3555 RO R0-12.43% STEP 2 NPV OF AN ALL EQUITY PROJECT YEAR CFAT PV FACTOR PV OF NOTE ON PV FACTOR 1/(1+r)An 1/(1+0.1243)A0 1/(1+0.1243)A1 AND SO ON AT 12.43% CFAT 1-18200000.00 0.8894 5087610.07 0.7911 7531344.73 0.70366206145.50 625100.30 STOCK DIV , NAV HEDGE FUND MF EV PE EPS DIV , ABNORMAL 0 18200000 5720000 9520000 8820000 NPV | HIGH LOW TARGET PRICE deberk . MARGIN MONEY , marginal tx PB ROPI | ApV ROSS e EVA MVAI erences: AL125 14:18 28-03-2019

Home ert Page Layout Formulas Data Review V Add-Ins 義Cut aCopy Σ AutoSum , General Fill В า 프. m. d..Δ. Ξミ 迣锂函Merge & Center. 弼皛Conditional-Format. Cell. Insert Delete Format Paste $, % , Sort &Find & ▼-yr Format Painter Formatting as Table Styles ClearFilter Select Clipboard FY144 FR Font Alignment Styles Cells dting FS STEP 3 GB GC GD FV NPV OF FINANCING SIDE EFFECTS FT FU FW FX FY FZ GA GE 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 NPV- LOAN AMOUNT-PV OF ALL INTEREST PAYMENTS-PV OF PRINCIPAL 9360000-((1-0.21)*(8%)"(9360000)/1.08)-((1-0.21)"(8%)"(6240000)/( 1.08"2))-((1-0.21)"(8%)"(3120000)/(1.08^3))- 3120000/1.08-3120000/(1.0842) 3120000/(1.08A3) NPV= NPV = 277086.05 STEP 4 APVADJUSTED PRESENT VALUE APV = APV = APV- NPV OF ALL EQUITY + NPV OF FINANCING SIDE EFFECTS 625100.30 902186.35 277086.05 | HIGH LOW TARGET PRICE STOCK DIV , NAV HEDGE FUND MF , EV PE EPS DIV , ABNORMAL deberk . MARGIN MONEY , marginal tx PB ROPI | ApV ROSS e EVA MVAI erences: AL125 14:19