Consider Avco’s RFX project from Section 18.3. Suppose that Avco is receiving government loan guarantees that allow it to borrow at the 6% rate. Without these guarantees, Avco would pay 6.5% on its debt.

a. What is Avco’s unlevered cost of capital given its true debt cost of capital of 6.5%?

b. What is the unlevered value of the RFX project in this case? What is the present value of the interest tax shield?

c. What is the NPV of the loan guarantees? (Hint : Because the actual loan amounts will fluctuate with the value of the project, discount the expected interest savings at the unlevered cost of capital.)

d. What is the levered value of the RFX project, including the interest tax shield and the NPV of the loan guarantees?

Advanced Topics in Capital Budgeting AppendixLO1