Question

0/1 pts Question 2 Roger has a levered cost of equity of 0.23. He is thinking of investing in a project with upfront costs of $6 million, which pays $1 million per year for the next 6 years. He is going to borrow $3 million to offset the startup costs at a rate of 0.04. His tax rate is 0.4. He will repay this loan at the end of the project. What is the NPV of this project, using the FTE method? 734,000 -2,233,634 margin of error +/- 10,000

Answer 1

We list the cash flows as given below

Year	0	1	2	3	4	5	6
Initial outlay	$       (6,000,000)
Annual cash flow		$        1,000,000	$        1,000,000	$        1,000,000	$        1,000,000	$        1,000,000	$        1,000,000
Bond principal	$          3,000,000						$      (3,000,000)
Interest payment		$         (120,000)	$         (120,000)	$         (120,000)	$         (120,000)	$         (120,000)	$         (120,000)
Tax on profits		$         (400,000)	$         (400,000)	$         (400,000)	$         (400,000)	$         (400,000)	$         (400,000)
Tax shield due to interest payment		$              48,000	$              48,000	$              48,000	$              48,000	$              48,000	$              48,000
Net cach flow	$       (3,000,000)	$            528,000	$            528,000	$            528,000	$            528,000	$            528,000	$      (2,472,000)
PV of net cash flow	$       (3,000,000)	$            429,268	$            348,999	$            283,739	$            230,682	$            187,546	$         (713,868)
NPV	$       (2,233,634)

We sum each year's cash flows to arrive at net cash flow each year. We discount these cash flows to arrive at PV of each year's cash flows. We sum them up to arrive at NPV