A firm will use a $2-$year, annual interest payment, risk$-$free bank loan with the characteristics below to partially finance a

project. The principal of the loan will be repaid at maturity $($at the end of year $2).$

In an adjusted present value $($APV$)$ calculation, what is the NPV associated with this financing $($i$.$e$.,$ the PV of the financing

effects$)($in $mill.$)?$

$NPV$

million $2$ points

$,$

If the firm pays a cheaper interest rate $($given below$)$ on this loan, what is the NPV associated with this financing $($in $mill.$)?$

A firm is considering a project that requires investments at time $0$ and time $1.$ The susbequent expected cash flows $($starting

at time $2)$ will continue in perpetuity. The magnitude of these perpetual cash flows depends on demand, which can take on

one of three values with probabilities as given.

What are the expected cash flows of the project at time $0-5?$

What is the NPV of the project at the discount rate given below? $($Use this rate for all calculations in this problem.$)$

The project can be abandoned at time $2$ in any of the $3$ possible states, with a total after$-$tax salvage given below, regardless

of demand. If the project is abandoned, the firm receives the time $2$ cash flow $($given above$)$ in addition to the salvage value.

after$-$tax salvage value $160$

i If the firm only abandons the project when it is optimal to do so$,$ what are the incremental cash flows associated with the

abandonment option in each of the $3$ demand states at times $2-4?$

What are the expected incremental cash flows on this option?

What is the value of this option at time $0?$

$V$

$2$ points

$2$ points

iv What is the NPV of the project including this abandonment option?

NPV

$1$ point