Question
Celtic Inc. is considering a 16-year project that will generate before tax cash flow of $18,000 per year for 16 years. The project requires a
Celtic Inc. is considering a 16-year project that will generate before tax cash flow of $18,000 per year for 16 years. The project requires a machine that costs $96,000. The CCA rate is 20% and the salvage value is $9,600. Celtic has cash of $66,000 and needs to borrow the balance at 6% interest rate to purchase the machine. Celtic is required to repay $10,000 at year 4 and the remaining balance at year 16. The corporate tax rate is 30%.
(a) If the cost of unlevered equity is 12%, the asset class remains open with a positive UCC after the project ends, and flotation cost is 2% of the amount borrowed, calculate the NPV of the project using the APV approach.
(b) If the cost of equity is 14% and the asset class remains open with a positive UCC after the project ends, calculate the NPV of the project using the FTE approach.
(c) If the weighted average cost of capital is 11% and the machine is the only asset in the asset class, calculate the NPV of the project using the WACC approach.
Step by Step Solution
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Step: 1
Given Information Project life 16 years Beforetax cash flow 18000year Initial machine cost 96000 CCA rate 20 Salvage value 9600 Cash available 66000 L...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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