Gemini Inc an all equity firm, is considering a $1.9 million investment that will be depreciated
according to the straight line method over its four year life. The project is expected to generate
earnings before taxes and depreciation of $685,000 per year for four years. The investment will
not change the risk level of the firm. The company can obtain a four year 7.5% loan (risk free rate)
to finance the project from a local bank. All principle will be repaid in one balloon payment
at the end of the fourth year.
If the company financed the project entirely with equity the firm's cost of capital would be 11%
The corporate tax rate is 24%.
Use the Adjusted Present Value Method (APV) to determine if they should undertake project
Vu
EBITDA	$685,000
Depr	$475,000
EBT	$210,000
tax	$50,400
NI	$159,600