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

◗ TABLE 19.3 Balance sheet for Wishing Well, Inc.

(figures in $ millions).

Cash and marketable securities 100 Bank loan 280 Accounts receivable 200 Accounts payable 120 Inventory 50 Current liabilities 400 Current assets 350 Real estate 2,100 Long-term debt 1,800 Other assets 150 Equity 400 Total 2,600 Total 2,600 Cash and marketable securities 1,500 Short-term debt 75,600 Accounts receivable 120,000 Accounts payable 62,000 Inventories 125,000 Current liabilities 137,600 Current assets 246,500 Property, plant, and equipment 302,000 Long-term debt Deferred taxes Shareholders’ equity Total 208,600 45,000 246,300 637,500 Other assets 89,000 Total 637,500

◗ TABLE 19.4 Simplified book balance sheet for Rensselaer Felt (figures in $

thousands).

Visit us at www.mhhe.com/bma 496 Part Five Payout Policy and Capital Structure borrowing rate is 8%, and DO will borrow $300,000 against the project. This debt must be repaid in two equal installments. 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 .

AppendixLO1