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Digital Organics (DO) has the opportunity to invest \$0.92 million now ( t = 0) and expects after-tax returns of \$520,000 in t = 1 and \$620,000 in t = 2. The project will last for two years only. The...

 Digital Organics (DO) has the opportunity to invest \$0.92 million now (t = 0) and expects after-tax returns of \$520,000 in t = 1 and \$620,000 in t = 2. The project will last for two years only. The appropriate cost of capital is 11% with all-equity financing, the borrowing rate is 7%, and DO will borrow \$220,000 against the project. This debt must be repaid in two equal installments. Assume debt tax shields have a net value of \$0.20 per dollar of interest paid. Calculate the projectâ€™s APV. (Do not round intermediate calculations. Rounddown your answer to the nearest whole dollar.)
Answered Same Day Dec 25, 2021

Solution

David answered on Dec 25 2021
Answe
Adjusted Present Value = Net Present Value (Unlevered Cash Flows) + Present Value (Tax Shields)
Ist Part = Discount Rate = Capital Cost
2nd Part = Discount Rate = Debt Cost
Annual Installment = [220,000 * 0.07 * (1 + 0.07)2] / [(1 + 0.07)2 â€“ 1] = \$121,680.19
Interest = [121,680.19 x 2] â€“...
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