Question
Dayton Mechanical, Inc. is currently evaluating a potential new investment. The investment will be financed with $700,000 of debt and $1,200,000 of equity. The (unleveraged)
Dayton Mechanical, Inc. is currently evaluating a potential new investment. The investment will be financed with $700,000 of debt and $1,200,000 of equity. The (unleveraged) after-tax cash flows, the CFATs, expected to result from the investment are $1 million per year for three years, after which time the project is expected to be sold off for a net after-tax $1 million in cash. The debt financing will take the form of three-year debt with interest payments of 12% per year on the remaining balance. Principal payments will be $100,000 in year 1, $200,000 in year 2, and $400,000 at the end of year 3. The net-benefit-to-leverage factor, T*, is 0.25 for this investment. The (unleveraged) required return for the project is 20%. What is the present value of the cash flows after tax ("basic" project income) from the project? What is the present value of the interest tax shield from the project? What is the project's net APV? (Enter your answer in dollars and cents).
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