The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will contribute $20,000 cash and borrow $80,000 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 $5,000. 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 $5; variable costs are $3; there are no fixed costs.

What is the NPV of the project using WACC methodology?

What is the NPV of the project using the APV methodology?

OCFO $100,000 rdebt 60% OCF $39,800 25,000 x ($5 $3) x (1 34) $20,000 x 0.34 1-4 asset 12 Ki equity 27.84 OCF5 $43,100-$39,800 $5,000 x (1 -.34) K WACC 8.74 t -Tax rate 34% Debt-to-equity ratio 4 Risk-free rate 20%