QUESTION 4

MVP, Inc., has produced rodeo supplies for over 27 years. The company currently has debt-equity ratio of 50% and the tax rate is 33%. The required return on the firm's levered equity is 16%. The company is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows:

Year Cash Flow

0 -$12,158,099

1 $5,931,366

2 $8,730,998

3 $8,815,369

1. The company has arranged a debt issue of $9,460,606 to partially finance the expansion. Under the loan, the company would pay interest of 9.3% at the end of each year on the outstanding balance at the beginning of the year. The company also would make year-end principal payments of one third of the debt, completely retiring the issue by the end of the third year.
2. Compute the NPV as an all equity company