Consider a project lasting one year only. The initial outlay is $1,000 and the expected inflow is $1,200. The opportunity cost of capital is r = .20. The borrowing rate is rD = .10, and the tax shield per dollar of interest is Tc = .35.
a. What is the project’s base-case NPV?
b. What is its APV if the firm borrows 30% of the project’s required investment?
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