Laura wants to buy a delivery truck. The truck costs $71,000, and will allow her to increase her after tax profits by $27,000 per year for the next 10 years. She will borrow 76% of the cost of the truck for 10 years, at an interest rate of 6%. Laura's unlevered cost of capital is 8% and her tax rate is 22%. The loan includes a $1,000 application fee. What is the NPV of buying the truck on these terms? Please use the APV method.
Laura wants to buy a delivery truck. The truck costs $71,000, and will allow her to increase her after tax profits by $27,000 per year for the next 10 years. She will borrow 76% of the cost of the truck for 10 years, at an interest rate of 6%. Laura's unlevered cost of capital is 8% and her tax rate is 22%. The loan includes a $1,000 application fee. What is the NPV of buying the truck on these terms? Please use the APV method.
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
Problem 1PS
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Transcribed Image Text:Laura wants to buy a delivery truck. The truck costs $71,000, and will allow her to increase her after-tax profits by $27,000 per year for the next 10 years. She will borrow 76% of the cost of the truck for 10 years, at an interest rate of 6%. Laura’s unlevered cost of capital is 8% and her tax rate is 22%. The loan includes a $1,000 application fee. What is the NPV of buying the truck on these terms? Please use the APV method.
Expert Solution
Step 1: Define unlevered cost of equity
The cost of equity financing for a business is represented by the unlevered cost of capital, which shows the expected return on investment for stockholders. It's an essential element of financial analysis because the company gets to know the expectations of the shareholders on their investment with the help of that.
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