4. Worldwide Trousers, Inc. is considering a $5 million expansion of their existing business. The initial investment will be depreciated straight-line over 5 years to zero salvage value. Consider the depreciation tax shield to be as risky as the project. The project will generate pretax earnings of $400,000 per year, and will not change the risk level of the firm. The firm can obtain a 5-year $2,000,000 subsidized loan at 8% to partially finance the project, and there is a 2% flotation cost associated with this subsidized loan. The estimated bankruptcy cost of this loan is $200,000. If the project were financed with all equity, the cost of capital would be 17%. The corporate tax rate is 34%, and the risk-free rate is 4%. The market is pricing loans of comparable risk at 12%.

Compute the adjusted present value (APV) of this 5-year project!

*show detailed calculations on how to arrive at the APV*