A firm is considering a project with the following characteristics:

Sales=$ 550,000 per year for indefinite future;

Cash costs=70% of sales;

Initial investment=$ 540,000;

Cost of capital if the firm were all-equity financed=20%.

Suppose that the firm finances the project with $200,000 in debt, and the remaining investment of $ 340,000 is financed with equity. Interest rate is 10%. The corporate tax rate is 40%.

1. Evaluate the investment using the APV, FTE, and WACC methods.
2. Both APV and WACC value UCFs, with no deduction of interest expense. Do these two methods overstate the tax burden?