You are evaluating a project that requires an investment of $102 today and garantees a single cash flow of $127 one year from now. You decide to use 100% debt​ financing, that​ is, you will borrow $102. The​ risk-free rate is 5% and the tax rate is 39%. Assume that the investment is fully depreciated at the end of the​ year, so without leverage you would owe taxes on the difference between the project cash flow and the​ investment, that​ is, $25. Calculate the NPV of this investment opportunity using the APV method. ​(Round to two decimal​places.) Using your answer to part ​(1), calculate the WACC of the project. ​(Round to two decimal​places.) Verify that you get the same answer using the WACC method to calculate NPV. ​(Round to two decimal​places.) Finally, show that​ flow-to-equity method also correctly gives the NPV of this investment opportunity. ​(Round to two decimal​places.)

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
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You are evaluating a project that requires an investment of $102 today and garantees a single cash flow of $127 one year from now. You decide to use 100% debt​ financing, that​ is, you will borrow $102. The​ risk-free rate is 5% and the tax rate is 39%. Assume that the investment is fully depreciated at the end of the​ year, so without leverage you would owe taxes on the difference between the project cash flow and the​ investment, that​ is, $25.

  1. Calculate the NPV of this investment opportunity using the APV method. ​(Round to two decimal​places.)
  2. Using your answer to part ​(1), calculate the WACC of the project. ​(Round to two decimal​places.)
  3. Verify that you get the same answer using the WACC method to calculate NPV. ​(Round to two decimal​places.)
  4. Finally, show that​ flow-to-equity method also correctly gives the NPV of this investment opportunity. ​(Round to two decimal​places.)
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