Consider a project to produce solar water heaters. It requires a $4 million investment

and offers a level after-tax cash flow of $1.75 million per year for 4 years. The opportunity cost of

capital is 12%, which reflects the project's business risk.

Suppose the project is financed with $5 million of debt and $5 million of equity.

The interest rate is 8% and the marginal tax rate is 20%. The debt will be paid off in equal annual

installments over the project's 4-year life. Calculate the projects APV.