Digital Organics (DO) has the opportunity to invest $0.92 million now (t = 0) and expects after-tax...

Question

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 project’s APV. (Do not round intermediate calculations. Rounddown your answer to the nearest whole dollar.)

David · Accepted Answer

Answer
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 – 1] = $121,680.19
Interest = [121,680.

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...

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