The bank proposes to lend the company €600,000 toward the €1.2 million required to invest in the project in Problem 1. The rate of interest would be 8%. The loan is repayable in three equal annual instalments, the first paid at the end of the first year.

Use the APV method to calculate the PV of the tax benefit of the loan if the company continues to pay taxes during the next four years.

Data From Problem 1:-

APVAL PLC is negotiating a bank loan to help fund the following project:

The company usually aims to borrow half the funds required for projects. The company’s treasurer expects to pay 8% on all new borrowing during the next four years. She also expects the company to pay corporate taxes at 30%. Consistent with 50% debt financing, she expects the cost of equity for the project will be 12%.

Use the WACC method to estimate the PV of the tax benefit from borrowing to finance half the cost of this project. Assume the company will continue to pay corporate taxes during the next four years.

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End of year 0 1 2 3 4 Investment -1,200 Operating cash flow after tax 500 500 500 500