Chapter 19, Problem 16PS

APV Digital Organics (DO) has the opportunity to invest $1 million now (t = 0) and expects after-tax returns of $600,000 in t = 1 and $700,000 in t = 2. The project will last for two years only. The appropriate cost of capital is 12% with all-equity financing, the borrowing rate is 8%, and DO will borrow $300.000 against the project. This debt must be repaid in two equal installments of $150,000 each. Assume debt tax shields have a net value of $.30 per dollar of interest paid. Calculate the project’s APV using the procedure followed in Table 19.2.