Question

Gemini, Inc., an all-equity firm, is considering a $1.81 million investment that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $615,000 per year for four year. The investment will not change the risk level of the firm. The company can obtain a four-year, 9.6 percent loan to finance the project from a local bank. All principal will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $65,000 in flotation fees, which will be amortized over the four-year life of the loan. If the company financed the project entirely with equity, the firm’s cost of capital would be 11 percent. The corporate tax rate is 40 percent.

   

Using the adjusted present value method, calculate the APV of the project. (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Please note- *Amortization period = 4 years

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.