Digital Organics (DO) has the opportunity to invest $850 million now (t = 0) and expects after-tax payoffs of $650 million in year 1 (t = 1) and $750 million in year 2 (t = 2). The project will last for two years only. The appropriate cost of capital is 10% with all-equity financing, the borrowing rate is 9%, and DO will borrow $300 million against the project. This debt must be repaid in two equal installments. Assume that debt tax shields have a net value of $0.2 per dollar of interest paid.

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a) What is the value of the project if Digital Organics is an all equity firm?

b) What is the amount of each debt repayment?

c) What is the expected interest payment in the first year?

d) What is the expected interest payment in the second year?

e) What is the present value of the interest tax shields?

f) What is the adjusted present value (APV) of the project?