3. Consider Table 2, which outlines the investment and operating cash flows for three projects. PV (ITS) is the present value of interest tax shields. Each project costs 200. Table 2 Project CF0 CFI CF2 CF4 1 2 3 (200) (200) 80 80 80 CF3 100 100 (200) 100 Corporation tax rate is 30% for all projects. 70 70 70 60 60 60 Debt 0 100 100 Equity Cost of debt 200 100 100 capital (%) 10% 10% 10% Cost of PV unlevered (ITS) equity (%) 15% 15% 15% 9.81 9.81 a) Consider Table 2. Calculate the net present value of project 1. Detail all calculations that you use. b) Consider Table 2. For project 2, calculate the required return on levered equity and the after-tax WACC. Detail all calculations that you use. c) Consider Table 2. Calculate the value of project 2 using the WACC approach. Detail all calculations that you use. How does the value of project 2 compare to the value of project 1? Discuss. d) Consider Table 2. Calculate the value of project 3 using adjusted present value (APV) approach. Detail all calculations. How does the value of project 3 compare to the value of project 2? Discuss.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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3. Consider Table 2, which outlines the investment and operating cash flows for three projects. PV (ITS) is the
present value of interest tax shields. Each project costs 200.
Table 2
Project CF0
CF1 CF2
CF3
CF4
1
2
3
(200)
100
80
(200)
100
80
(200) 100
80
Corporation tax rate is 30% for all projects.
70
70
70
60
60
60
Debt
0
100
100
Equity Cost of
debt
200
100
100
Cost of
unlevered
capital equity
(%)
(%)
10%
15%
10%
15%
10%
15%
PV
(ITS)
9.81
9.81
a) Consider Table 2. Calculate the net present value of project 1. Detail all calculations that you use.
b) Consider Table 2. For project 2, calculate the required return on levered equity and the after-tax WACC.
Detail all calculations that you use.
c) Consider Table 2. Calculate the value of project 2 using the WACC approach. Detail all calculations that
you use. How does the value of project 2 compare to the value of project 1? Discuss.
d) Consider Table 2. Calculate the value of project 3 using adjusted present value (APV) approach. Detail all
calculations. How does the value of project 3 compare to the value of project 2? Discuss.
Transcribed Image Text:3. Consider Table 2, which outlines the investment and operating cash flows for three projects. PV (ITS) is the present value of interest tax shields. Each project costs 200. Table 2 Project CF0 CF1 CF2 CF3 CF4 1 2 3 (200) 100 80 (200) 100 80 (200) 100 80 Corporation tax rate is 30% for all projects. 70 70 70 60 60 60 Debt 0 100 100 Equity Cost of debt 200 100 100 Cost of unlevered capital equity (%) (%) 10% 15% 10% 15% 10% 15% PV (ITS) 9.81 9.81 a) Consider Table 2. Calculate the net present value of project 1. Detail all calculations that you use. b) Consider Table 2. For project 2, calculate the required return on levered equity and the after-tax WACC. Detail all calculations that you use. c) Consider Table 2. Calculate the value of project 2 using the WACC approach. Detail all calculations that you use. How does the value of project 2 compare to the value of project 1? Discuss. d) Consider Table 2. Calculate the value of project 3 using adjusted present value (APV) approach. Detail all calculations. How does the value of project 3 compare to the value of project 2? Discuss.
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