Case Sampa Video, Inc.

A small video chain is deciding whether to engage in a new line of delivery business, which implies

setting up a page where customers could choose movies based on available in-store inventory and pick

a time for delivery. The purpose of this analysis is to obtain an estimate of the net present value of this

project, which requires an upfront investment of $800,000. Part of this amount will come from debt

of $750,000 (held in perpetuity). Currently, Sampa Video, Inc. is unlevered. Assume that the cost of

debt is 6.8%, the corporate tax is 40% and the return required by equity investors in the all-equity rm

is 15.8%. Sampa Video, Inc. is planning to run the new line of delivery only for the next 5 years. The

following nancial information is available regarding the expected cash

ows of the new line of delivery

(in $ thousands):

Projected Projected Projected Projected Projected

(t=1) (t=2) (t=3) (t=4) (t=5)

NWC 0 0 0 0 0

Capital Expenditures 300 300 300 300 300

Depreciation 200 225 250 275 300

Revenue Costs 180 360 585 840 1,125

Questions:

1. Calculate the unlevered present value

2. Calculate the present value of the expected interest tax shields

3. Calculate the APV.

4. Why is APV a preferable method to WACC in this situation? How do their assumptions differ?

Can you explain individual components of Q1, Q2 ? especially PV of FCF in Q1....