A Project Has a NPV, Assuming All Equity Financing, of $1.5

question 24

Essay

A project has a NPV, assuming all equity financing, of $1.5 million. To finance the project, debt is issued with associated floatation costs of $60,000. The floatation costs can be amortized over the project's 5 year life. The debt of $10 million is issued at 10% interest, with principal repaid in a lump sum at the end of the fifth year. If the firm's tax rate is 34%, calculate the project's APV.

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Definitions:

Useful Life

The estimated duration of time that an asset is expected to be productive or useful, beyond which it is likely to be inefficient or obsolete.

Double-declining-balance Method

An accelerated depreciation method that doubles the straight-line depreciation rate and applies it to the undepreciated balance at the start of each period.

Straight-line Method

A method of calculating depreciation for an asset that spreads the cost evenly over its useful life.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded for an asset over its useful life, reducing its book value.