(a) What is the NPV of the project using the WACC methodology?

(b) What is the PV of after-tax operating CF of the project using the APV methodology?

(c) What is the PV of depreciation tax shield using the APV methodology? (d) What is the PV of interest tax shield using the APV methodology?

(e) What is the NPV of the project using the APV methodology?

(f) What is the NPV of the project using the APV methodology if the borrowing rate is 6%?

= (12 points) The 4-year project requires equipment that costs $100,000. Ku 6%, K = PWACC = 5.5%. Tax rate is 34%. If undertaken, the shareholders will borrow $30,000 at 4% with an interest-only loan with a maturity of 4 years and annual interest payments. There will be a pre-tax salvage value of $10,000. The equipment will be depreciated straight-line over the 4-year life of the project. There are no other start-up costs at year 0. During years 1 through 4, the firm will sell 35,000 units of product at $3.5; variable costs are $2.5. There are no fixed costs. i = rdebt = 4%, Ku = 6%, K = rwACC 5.5% It = 30,000 x 4% = 1,200 Dz = (100,000 10,000)/4 = 22,500 T= Tax rate 34% CF0 = -$100,000 CF1-3 = $30, 750 = 35,000 x (1 0.34) + $22,500 x 0.34 OC F1--3 D1--3 CF4 = $37, 350 = $30, 750 + $10,000 x (1 0.34) = 1-T = (12 points) The 4-year project requires equipment that costs $100,000. Ku 6%, K = PWACC = 5.5%. Tax rate is 34%. If undertaken, the shareholders will borrow $30,000 at 4% with an interest-only loan with a maturity of 4 years and annual interest payments. There will be a pre-tax salvage value of $10,000. The equipment will be depreciated straight-line over the 4-year life of the project. There are no other start-up costs at year 0. During years 1 through 4, the firm will sell 35,000 units of product at $3.5; variable costs are $2.5. There are no fixed costs. i = rdebt = 4%, Ku = 6%, K = rwACC 5.5% It = 30,000 x 4% = 1,200 Dz = (100,000 10,000)/4 = 22,500 T= Tax rate 34% CF0 = -$100,000 CF1-3 = $30, 750 = 35,000 x (1 0.34) + $22,500 x 0.34 OC F1--3 D1--3 CF4 = $37, 350 = $30, 750 + $10,000 x (1 0.34) = 1-T