Question

A firmʹs investments cost $80000 and are expected to return $97000 before taxes at the end of 1 year. The firm is financed with $50000 debt at an expected rate of 6%. The firm pays taxes at the marginal rate of 35%, and the appropriate cost of capital is 8%. What is the firmʹs adjusted present value (APV)?

91,050

85,278                                                      

92,100

90,000

Answer 1

Answer : Calculation of Adjusted present Value :

For this first calculate NPV assuming that entire money is financed from equity. Discount rate to be used is appropriate cost of capital (8%)

NPV = Present value of cash inflow

= 97000 *( NPV Factor @ 8% for 1 year ) - 80000

= [ 97000 * 0.92592592592 ] - 80000

= 9814

Now we will calculate PV of tax shield on Interest

PV Tax shield on Interest = [0.35 tax rate (50000 debt * 0.06 debt int.)] / {1 – [1 / (1 + 0.06 debt cost)]}

= 1050 / 0.056604

= 18550

Adjusted present value (APV) = 9814 + 18550

= 28364

Note : Please check with the options given. Or either the number of year detail. Because the adjusted present value is calculated as above only.