Part A

Part B

Part A Company J is considering a project with a 4-year lifespan. The initial cash flow estimate is $125 million in the first year increasing by $125 million in each of the years 2 through 4. To begin the project, the company will need to invest $1 billion dollars. Company I would like to cover the initial investment amount with existing internal resources and thereby not borrow. As such it remains an all-equity firm. The unlevered cost of its equity is 10%, similar to other firms in the industry sector. There will be no terminal value of significance at the end of year 4. Using the domestic APV equation from Chapter 18 and noted below, construct a spreadsheet model to determine whether it makes sense for Company J to proceed with this project. Please review the example for an APV model that was introduced in the lecture when developing your answer. Complete the following tables. Round your answers to the nearest dollar. T APV = (OCF)(1-1) + TD. TI (1+K.) + (1+1) TV, + (1+K.)" -C, t=1 APV = (OCF)(1-) + D. + (1+.) (1+i) TV, (1+K.)" C. Parameters Symbol Value Co Initial Outlay Unlevered Equity Cost % Ku % Years Project Life T Terminal Value TVT 0 1 2 3 4 Initial Outlay Cash Flows Discounted Cash Flows APV = $ Based on the APV, would you recommend this project? > Part B: Now, imagine that Company J finances the project with $600,000,000 of debt at 8%. As such the company becomes a levered firm due to its acquisition of debt. What do the debt and related interest expense mean for the APV of the project if the tax rate is 40%? Update your spreadsheet model from above to demonstrate the effect of this debt on your decision. Complete the following tables. Round your answers to the nearest dollar. Parameters Symbol Value Co Initial Outlay Unlevered Equity Cost % Ku % Years Project Life T Terminal Value TVT Amount Borrowed Tax Rate % % Interest Rate % d id % 1 2 3 3 4 0 Initial Outlay Cash Flows Discounted Cash Flows Interest Payments Interest Tax Shield Discounted Tax Shield APV = $ > Based on the APV including the loan, would you recommend this project