Questions
MGT232H5 F LEC0101
Single choice
Continuing on from Question 1: ABC is still considering investing in the project with the initial cost of $560,000 and that will earn unlevered free cash flows (FCFF) of $96,000 per year in perpetuity. The unlevered cost of capital is still 20% and the tax rate is 40%. Assume instead of funding with 100% equity, ABC funds the project with $280,000 in perpetual debt (wtih an interest rate of 10%) and the remainder of funding will be with equity. What is the NPV of the levered project using the APV method?
Options
A.$32,000
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Step-by-Step Analysis
We start by separating the project value from the financing effects, following the Adjusted Present Value (APV) approach.
First, compute the value of the project as if it were funded with 100% equity (the unlevered case).
- The project generates unlevered free cash flows to the firm (FCFF) of $96,000 per year in perpetuity.
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