OPPO Co. is offered an opportunity to invest $2 million now and receive after-tax cash flows of $1.1 million at the end of year 1 and $1.4 million at the end of year 2. This project is expected to last for two years only. The cost of capital is 12% if it is all-equity financed. OPPO intends to borrow $400,000 with an interest rate of 8%, calculated based on the beginning balance of loan in each year. The loan principal must be repaid in two equal annual instalments. Both principal repayment and interest payment will occur at the end of each year. Assume OPPO has a marginal corporate tax rate of 30%.

Required:

(a)Calculate the base-case NPV of this project. (3 marks)

(b)Calculate the adjusted present value (APV) of this project. (10 marks)