Question

Swamp & Sand Industries has the following data. At a discount rate of 12%, calculate its Adjusted Present Value (APV) for 20X1 through 20X3. Interest expense is $5 million per year. The interest rate on debt is 6%. The corporate tax rate is 40%.

	20X1	20X2	20X3
FCF	177	177	177
Depreciation	6	6	6

All numbers are in millions.

Answer 1

($ in Million)

ADJUSTED PV = BASE CASE PV + PV OF TAX SAVING ON INTEREST

Base case Present Value is the PV of the project as if it is all-equity financed.

We have given Free Cash Flows, (Note- Depreciation is not required because we have already given Cash Flows, Cash Flow = Net Profit + Non Cash Expense).

Base Case PV = Free Cash Flow * Annuity Factor @ 12% for 3 years

= 177 * 2.4018 = 425.1186

Tax Saving on Interest = $ 5 * 40% = $ 2

Present Value = $2 * Annuity Factor @ 6% for 3 years = 2 * 2.6730 = 5.3460

Adjusted PV = BASE CASE PV + PV OF TAX SAVING ON INTEREST

= $425.1186 + $5.3460 = $430.4646