Samual Electricals is evaluating a capital project requiring an outlay of Rs.60 million. It is expected to generate a net cash inflow of Rs.15 million per year for 6 years. The opportunity cost of capital is 15 percent. Sam Electricals can raise a term loan of Rs.30 million for the project. The term loan will carry an interest rate of 12 percent. The principal amount would be repayable in 5 equal instalments, the first instalment falling due at the end of the second year. The balance amount required for the project can be raised by issuing external equity. The issue cost is expected to be 8 percent. The tax rate for the company is 30 percent.

Questions: (i) What is the base case NPV?

(ii) What is the adjusted NPV if the adjustment is made for (a) the issue cost of external equity, (b) tax associated with debt?

(iii) What are the merits of APV approach?

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