Question 1:

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. Corp oration 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.