Suppose you are presented with a 5-year project that requires equipment that costs USD 100,000. If undertaken, the shareholders will contribute USD 25,000 cash and borrow the rest at 6% with an interest only loan with a maturity of 5 years and annual interest payments. The equipment will be depreciated straight-line to zero over the 5-year life of the project. There will be a pre-tax salvage value of USD 5,000. The corporate tax rate is 35%. There are no other start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at USD 5; variable costs are USD 3; there are no fixed costs.

a) (3.5 points) Calculate the NPV of the depreciation tax shield using the APV methodology.