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Question 1 Sloppy Inc., is an accounting company, who plans to develop a new tax software package. Having estimated the stream of cash-flows the software
Question 1 Sloppy Inc., is an accounting company, who plans to develop a new tax software package. Having estimated the stream of cash-flows the software is expected to generate, the company's CFO decides to value the project using both the WACC and APV approaches, to check the consistency of her valuation. More in detail: 1. To value the project using the WACC, the CFO discounts the actual cash flows of the project at the after-tax WACC. 2. To value the project using the APV, she discounts the unlevered free cash-flows at the pre-tax WACC, and adds the present value of the tax shields, discounted at the pre-tax WACC. Carefully explain whether either methodology is correctly employed and/or whether to adopt it in the proposed way, specific assumptions are needed. 18 marks
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