A firm is considering a project that will last five years and will generate an annual cash flow of $9 million. The project requires an initial investment of $28 million. Assume that the cost of equity for the project is 20% if the project is 100 percent equity financed. The firm can obtain a loan for $22.5 million to start the project, at a rate of 10 percent ($2.25 million in interest paid each year, with principal paid in a lump sum at the end of the loan). However, the lender will only extend the loan for three years. The firm's tax rate is 30 percent. Calculate the APV of the project. Is this investment worthwhile for the firm?
A firm is considering a project that will last five years and will generate an annual cash flow of $9 million. The project requires an initial investment of $28 million. Assume that the cost of equity for the project is 20% if the project is 100 percent equity financed. The firm can obtain a loan for $22.5 million to start the project, at a rate of 10 percent ($2.25 million in interest paid each year, with principal paid in a lump sum at the end of the loan). However, the lender will only extend the loan for three years. The firm's tax rate is 30 percent. Calculate the APV of the project. Is this investment worthwhile for the firm?
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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A firm is considering a project that will last five years and will generate an annual cash flow of $9 million. The project requires an initial investment of $28 million. Assume that the
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