Question

A firm is evaluating a project with an initial investment at time 0 of $640,000. The present value of the levered cash flows is $729,400 and the net present value of the project is $157,000. Using the flow-to-equity method of valuation determine the amount borrowed.

$89,400

$246,400

$67,600

$54,300

$64,000

Answer 1

c. $67,600

NPV = $729,400 - ($640,000 - Amount borrowed)

$157,000 = $729,400 - ($640,000 - Amount borrowed)

$640,000 - Amount borrowed = $729,400 - $157,000

$640,000 - Amount borrowed = $572,400

Amount borrowed = $640,000 - $572,400

Amount borrowed = $67,600