Ship Inc. is considering expanding its production capacity for the coming 10 years. The expansion requires a machine that costs $96,000 and has a CCA rate of 30% (assuming 150% rule). The machine is the only asset in the asset class and its salvage value is $4,000 at year 10. Ship will generate $21,500 annual before-tax cash flow for 10 years. The cost of unlevered equity is 15% and the cost of debt is 5%. The flotation cost is 3% of the debt and Ship will borrow 20% of the machine cost and the flotation cost. The corporate tax rate is 40%.

a) Using the APV method, calculate the NPV.

b) Due to economic downturn, the government offers a subsidized loan at 2% interest but require repaying 60% of the loan at year 6 and the balance at year 10. Using the APV method, calculate NPV.