Knotts, Inc., an all-equity firm, is considering an investment of $1.88 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $614,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 9.4 percent loan to finance the project from a local bank. All principal will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $64,000 in flotation fees, which will be amortized over the four-year life of the loan. If the company financed the project entirely with equity, the firm's cost of capital would be 11 percent. The corporate tax rate is 23 percent. Using the adjusted present value method, calculate the APV of the project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) APV 499.37 %24
Knotts, Inc., an all-equity firm, is considering an investment of $1.88 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $614,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 9.4 percent loan to finance the project from a local bank. All principal will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $64,000 in flotation fees, which will be amortized over the four-year life of the loan. If the company financed the project entirely with equity, the firm's cost of capital would be 11 percent. The corporate tax rate is 23 percent. Using the adjusted present value method, calculate the APV of the project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) APV 499.37 %24
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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Transcribed Image Text:Knotts, Inc., an all-equity firm, is considering an investment of $1.88 million that will be
depreciated according to the straight-line method over its four-year life. The project is
expected to generate earnings before taxes and depreciation of $614,000 per year for
four years. The investment will not change the risk level of the firm. The company can
obtain a four-year, 9.4 percent loan to finance the project from a local bank. All principal
will be repaid in one balloon payment at the end of the fourth year. The bank will charge
the firm $64,000 in flotation fees, which will be amortized over the four-year life of the
loan. If the company financed the project entirely with equity, the firm's cost of capital
would be 11 percent. The corporate tax rate is 23 percent.
Using the adjusted present value method, calculate the APV of the project. (Do not
round intermediate calculations and enter your answer in dollars, not millions of
dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
APV
2$
499.37
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