Question

Digital Organics (DO) has the opportunity to invest $1.15 million now (t = 0) and expects after-tax returns of $730,000 in t = 1 and $830,000 in t = 2. The project will last for two years only. The appropriate cost of capital is 11% with all-equity financing, the borrowing rate is 7%, and DO will borrow $270,000 against the project. This debt must be repaid in two equal installments of $135,000 each. Assume debt tax shields have a net value of $0.20 per dollar of interest paid. Calculate the project’s APV. (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations. Round your answer to the nearest whole number.)

Answer #1

Digital Organics (DO) has the opportunity to invest $1.15
million now (t = 0) and expects after-tax returns of
$730,000 in t = 1 and $830,000 in t = 2. The
project will last for two years only. The appropriate cost of
capital is 11% with all-equity financing, the borrowing rate is 7%,
and DO will borrow $270,000 against the project. This debt must be
repaid in two equal installments of $135,000 each. Assume debt tax
shields have a net...

Digital Organics (DO) has the opportunity to invest $1.03
million now (t = 0) and expects after-tax returns of $630,000 in t
= 1 and $730,000 in t = 2. The project will last for two years
only. The appropriate cost of capital is 11% with all-equity
financing, the borrowing rate is 7%, and DO will borrow $330,000
against the project. This debt must be repaid in two equal
installments of $165,000 each. Assume debt tax shields have a net...

Digital Organics (DO) has the opportunity to invest $0.94
million now (t = 0) and expects after-tax returns of $540,000 in t
= 1 and $640,000 in t = 2. The project will last for two years
only. The appropriate cost of capital is 13% with all-equity
financing, the borrowing rate is 9%, and DO will borrow $240,000
against the project. This debt must be repaid in two equal
installments. Assume debt tax shields have a net value of $0.40...

A project costs $1 million and has a base-case NPV of exactly
zero (NPV = 0). (A negative answer should be indicated by a minus
sign. Enter your answers in dollars, not millions of dollars.)
a. If the firm invests, it has to raise $690,000 by a stock
issue. Issue costs are 19.75% of net proceeds. What is the
project’s APV?
b. If the firm invests, there are no issue
costs, but its debt capacity increases by $690,000. The present...

Consider a project to produce solar water heaters. It requires a
$10 million investment and offers a level after-tax cash flow of
$1.69 million per year for 10 years. The opportunity cost of
capital is 11.25%, which reflects the project’s business risk. a.
Suppose the project is financed with $7 million of debt and $3
million of equity. The interest rate is 7.25% and the marginal tax
rate is 21%. An equal amount of the debt will be repaid in...

Background Story
Dorchester Ltd., is an old-line confectioner specializing in
high-quality chocolates. Through its facilities in the United
Kingdom, Dorchester manufactures candies that it sells throughout
Western Europe and North America (United States and Canada). With
its current manufacturing facilities, Dorchester has been unable to
supply the U.S. market with more than 225,000 pounds of candy per
year. This supply has allowed its sales affiliate, located in
Boston, to be able to penetrate the U.S. market no farther west
than...

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