Dear Sirs,

I got a homework as below. Can I have some advices how to tackle these questions? If possible, I would like to have some cases which is similar to this case.

Thank you in advance for your support.

Best Regards,

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. Half of this amount will come from a 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(t=1) Projected(t=2) Projected(t=3)Projected(t=4) Projected(t=5)

NWC 0 0 0 0 0

Capital Expenditures 300 300 300 300 300

Depreciation 200225 250 275 300

Revenue Costs 180360 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 dier?