1.Blue Rabbit Corporation is looking to build a toll road in Kentucky. The initial investment in paving equipment is $184 million. The equipment will be fully depreciated using the straight-line method over its economic life of ten years. Earnings before interest, taxes, and depreciation collected from the toll road are projected to be $19.25 million per annum for 20 years starting from the end of the first year. The corporate tax rate is 25 percent. The required rate of return for the project under all-equity financing is 8.82 percent.

This project could be privately financed by taking out a $100m loan over a nine-year period. The private, pretax cost of debt is 6.15 percent. Flotation costs would equal 1.4% of the loan total.

Alternatively, to encourage investment in the country's infrastructure, the U.S. government could subsidize the project with a $100 million, 9-year loan at an interest rate of 4.85 percent per year with zero flotation costs.

For either loan, all principal will be repaid in one balloon payment at the end of Year 9.

a.What is the NPV of the all equity project? Explain whether you would proceed with the project if it was an all-equity project.

b.What is the value of this project using the private debt financing with equity? (Hint: APV) Explain whether you would pursue the project using this private debt financing.

c.What is the value of this project with the subsidized loan? Explain whether you would pursue the project with the subsidized loan.