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Problem 18-16 (NEEDS TO BE IN EXCEL WITH FORMULAS) You are evaluating a project that requires an investment of $90 million today and provides a
| Problem 18-16 (NEEDS TO BE IN EXCEL WITH FORMULAS) | |||||||||
| You are evaluating a project that requires an investment of $90 million today and provides a single cash flow of $115 million for sure one year from now. You decide to use 100% debt financing, that is, you will borrow $90 million. The risk-free rate is 5% and the tax rate is 40%. Assume that the investment is fully depreciated at the end of the year, so without leverage you would owe taxes on the difference between the project cash flow and the investment. | |||||||||
| a. | Calculate the NPV of this investment opportunity using the APV method. | ||||||||
| b. | Using your answer to part (a), calculate the WACC of the project. | ||||||||
| c. | Verify that you get the same answer using the WACC method to calculate NPV. | ||||||||
| d. | Finally, show that flow-to-equity also correctly gives the NPV of this investment opportunity. | ||||||||
| Investment today (million) | $90.00 | ||||||||
| Amount of debt (million) | $90.00 | ||||||||
| Cash flow in 1 year (million) | $115.00 | ||||||||
| Tax rate | 40% | ||||||||
| Risk-free rate | 5.00% | ||||||||
| a. | Calculate the NPV of this investment opportunity using the APV method. | ||||||||
| Tax basis at year end (million):_____________ | |||||||||
| Taxes owed (million):________ | |||||||||
| FCF at year end (million):____________ | |||||||||
| VU (million):________ | |||||||||
| Interest expense (million):__________ | |||||||||
| Interest tax shield (million):___________ | |||||||||
| PV of ITS (million):___________ | |||||||||
| VL (million):___________ | |||||||||
| NPV (million):___________ | |||||||||
| b. | Using your answer to part (a), calculate the WACC of the project. | ||||||||
| Debt-to-value ratio:__________ | |||||||||
| WACC:_________ | |||||||||
| c. | Verify that you get the same answer using the WACC method to calculate NPV. | ||||||||
| VL (million):_________ | |||||||||
| NPV (million):__________ | |||||||||
| d. | Finally, show that flow-to-equity also correctly gives the NPV of this investment opportunity. | ||||||||
| After-tax interest expense (million):________ | |||||||||
| FCFE (million):__________ | |||||||||
| NPV (million):__________ | |||||||||
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The Palgrave Handbook Of Technological Finance
Authors: Raghavendra Rau, Robert Wardrop, Luigi Zingales
1st Edition
3030651169, 978-3030651169
