•Consider a project with the following data
•The 5-year project requires equipment that costs $100,000. If
undertaken, the shareholders will contribute $20,000 cash and
borrow $80,000 at 6% with an interest-only loan with a maturity
of 5 years and annual interest payments. The equipment will be
depreciated straight-line to zero over the 5-year life of the
project. There will be a pre-tax salvage value of $5,000. There
are no other start-up costs at year 0. During years 1 through 5,
the firm will sell 25,000 units of product at $5; variable costs are
$3; there are no fixed costs. Debt-to-equity ration is 4.
•What is the NPV of the project using the WACC methodology?
•What is the present value of the project using the APV
Q1: NPV vs APV
τ=tax rate=34% rf=2%