Homework Answers
Answer-1
NPV = -Initial Investment + ((cash Flow/(1+i)^t)
= -$1000 init. invest. + ($146 ann. ret. / 0.15 ret. on eq.) = -$26.67
APV = NPV + PV of debt financing
PV = (0.25 tax rate ($200 debt * 0.07 debt int.)) / (1 – (1 / (1 + 0.07 debt cost)))
= $3.5 / 0.0655
= $53.44
APV = NPV + PV
= -$26.67 NPV + $53.44 PV of debt fin. adv.
= $26.77
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