18. APV (S18-4) Consider another perpetual project like the crusher described in Section 18-1. Its initial investment is $1,000,000, and the expected cash inflow is $95,000 a year in Historical Forecast Year −2 −1 0 1 2 3 4 5 1. Sales 35,348 39,357 40,123 36,351 30,155 28,345 29,982 30,450 2. Cost of goods sold 17,834 18,564 22,879 21,678 17,560 16,459 15,631 14,987 3. Other costs 6,968 7,645 8,025 6,797 5,078 4,678 4,987 5,134 4. EBITDA (1 – 2 – 3) 10,546 13,148 9,219 7,876 7,517 7,208 9,364 10,329 5. Depreciation 5,671 5,745 5,678 5,890 5,670 5,908 6,107 5,908 6. EBIT (Pretax profit) (4 – 5) 4,875 7,403 3,541 1,986 1,847 1,300 3,257 4,421 7. Tax at 28% 1,365 2,073 991 556 517 364 912 1,238 8. Profit after tax (6 – 7) 3,510 5,330 2,550 1,430 1,330 936 2,345 3,183 9. Change in working capital 325 566 784 –54 –342 –245 127 235 10. Investment (change in gross fixed assets) 5,235 6,467 6,547 7,345 5,398 5,470 6,420 6,598

⟩ TABLE 18.5 Cash flow projections for Chiara Corp. (ZAR thousands).

548 Part Five Payout Policy and Capital Structure perpetuity. The opportunity cost of capital with all-equity financing is 10%, and the project allows the firm to borrow at 7%. The tax rate is 21%.

Use APV to calculate the project’s value.

a. Assume first that the project will be partly financed with $400,000 of debt and that the debt amount is to be fixed and perpetual.

b. Then assume that the initial borrowing will be increased or reduced in proportion to changes in the market value of this project.

Explain the difference between your answers to

(a) and (b).