Celtic Inc. is considering a 16-year project that will generate before tax cash flow of $18,000 per year for 16 years. The project requires a machine that costs $96,000. The CCA rate is 20% and the salvage value is $9,600. Celtic has cash of $66,000 and needs to borrow the balance at 6% interest rate to purchase the machine. Celtic is required to repay $10,000 at year 4 and the remaining balance at year 16. The corporate tax rate is 30%. (a) If the cost of unlevered equity is 12%, the asset class remains open with a positive UCC after the project ends, and flotation cost is 2% of the amount borrowed, calculate the NPV of the project using the APV approach. (b) If the cost of equity is 14% and the asset class remains open with a positive UCC after the project ends, calculate the NPV of the project using the FTE approach. (c) If the weighted average cost of capital is 11% and the machine is the only asset in the asset class, calculate the NPV of the project using the WACC approach
Celtic Inc. is considering a 16-year project that will generate before tax cash flow of $18,000 per
year for 16 years. The project requires a machine that costs $96,000. The CCA rate is 20% and
the salvage value is $9,600. Celtic has cash of $66,000 and needs to borrow the balance at 6%
interest rate to purchase the machine. Celtic is required to repay $10,000 at year 4 and the
remaining balance at year 16. The corporate tax rate is 30%.
(a) If the cost of unlevered equity is 12%, the asset class remains open with a positive UCC
after the project ends, and flotation cost is 2% of the amount borrowed, calculate the
the project using the APV approach.
(b) If the
project ends, calculate the NPV of the project using the FTE approach.
(c) If the weighted average cost of capital is 11% and the machine is the only asset in the asset
class, calculate the NPV of the project using the WACC approach.
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