Dayton Mechanical, Inc. is currently evaluating a potential new investment. The investment will be financed with 5700,000 of debt and $1,200,000 of equity. The (unleveraged) after-lax cash flows, the CATs, expected to result from the investment are $1 million per year for three years, after which time the project is expected to be sold off for a net after-tax $1 million in cash. The debt financing will take the form of three-year debt with interest payments of 12% per year on the remaining balance. Principal payments will be $100,000 in year 1, $200,000 in year 2, and $400,000 at the end of year 3. The net-benefit-to-leverage factor, T^, is 0.25 for this investment. The (unleveraged) required return for the project is 20%. What is the present value of the interest tax shield from the project?
Dayton Mechanical, Inc. is currently evaluating a potential new investment. The investment will be financed with 5700,000 of debt and $1,200,000 of equity. The (unleveraged) after-lax cash flows, the CATs, expected to result from the investment are $1 million per year for three years, after which time the project is expected to be sold off for a net after-tax $1 million in cash. The debt financing will take the form of three-year debt with interest payments of 12% per year on the remaining balance. Principal payments will be $100,000 in year 1, $200,000 in year 2, and $400,000 at the end of year 3. The net-benefit-to-leverage factor, T^, is 0.25 for this investment. The (unleveraged) required return for the project is 20%. What is the present value of the interest tax shield from the project?
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 4P
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Dayton Mechanical, Inc. is currently evaluating a potential new investment. The investment will be financed with
5700,000 of debt and $1,200,000 of equity. The (unleveraged) after-lax cash flows, the CATs, expected to result from
the investment are $1 million per year for three years, after which time the project is expected to be sold off for a net
after-tax $1 million in cash. The debt financing will take the form of three-year debt with interest payments of 12% per
year on the remaining balance. Principal payments will be $100,000 in year 1, $200,000 in year 2, and $400,000 at the
end of year 3. The net-benefit-to-leverage factor, T^, is 0.25 for this investment. The (unleveraged) required return for
the project is 20%. What is the present value of the interest tax shield from the project?
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