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Gemini, Inc., an all-equity firm, is considering an investment of $1.67 million that will be depreciated according to the straight-line method over its four-year life.
Gemini, Inc., an all-equity firm, is considering an investment of $1.67 million 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 $601,000 per year for four years. | |||||||||
The investment will not change the risk level of the firm. The company can obtain a four-year, 8.2 percent loan to finance the project from a local bank. | |||||||||
All principal will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $51,000 in flotation fees, which will be amortized over the four-year life of the loan. | |||||||||
If the company financed the project entirely with equity, the firms cost of capital would be 14 percent. The corporate tax rate is 30 percent. | |||||||||
Using the adjusted present value method, calculate the APV of the project. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. | |||||||||
Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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