Question
2. Urban Solar (US) has the opportunity to invest $2.75 million now (t = 0) and expects aftertax cash flow of $1,800,000 in t =
2. Urban Solar (US) has the opportunity to invest $2.75 million now (t = 0) and expects aftertax cash flow of $1,800,000 in t = 1 and $2,500,000 in t = 2. The project will last for two years only. The opportunity cost of capital is 15% with all-equity financing, the borrowing rate is 6%, and US will borrow $2 million against the project. This debt must be repaid in two equal installments of $1 million each. Assume the tax rate is 21%.
A. Calculate the base case NPV of this project.
B. What is the interest tax shield each year?
C. Calculate the projects APV.
D. If the firm incurs issue costs of $50,000 to raise the required equity, what will be the APV?
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