Question
Mega Millions Inc is considering investing in a project with annual after-tax cash flows of $15 million per annum for five years. Initial investment cost
Mega Millions Inc is considering investing in a project with annual after-tax cash flows of $15 million per annum for five years. Initial investment cost is $20 million.
The debt capacity of the company will increase by
$20 million over the life of the project, with issue costs of debt of $500,000. Interest rates are expected to remain at 8% for the duration of the project.
The existing cost of equity for the company is 15% and the current ratio of market value of debt:market value of equity is 1:3. Corporation tax is 30%.
Required:
Calculate the APV of the project and recommend whether Mega Millions should undertake the investment with the proposed method of financing.
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