Ef 327. MVP Inc. has produced rodeo supplies for over 20 years. The company currently has a debt-to-equity ratio of 50 percent and is in the40 percent tax bracket. The required return on the firm's levered equity is 16 percent. MVP is planning to expand its productioncapacity. The equipment to be purchased is expected to generate the following unlevered cash flows:Year0123Cash Flow-$18,000,0005,700,0009,500,0008,800,000The company has arranged a $9.3 million debt issue to partially finance the expansion. Under the loan, the company would payinterest of 9 percent at the end of each year on the outstanding balance at the beginning of the year. The company would also makeyear-end principal payments of $3,100,000 per year, completely retiring the issue by the end of the third year.Calculate the APV of the project. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ signin your response.)APV$

First, we have to calculate the unlevered cost of capital to discount the given cash flows and…

Answered: Calculate the APV of the project. (Do…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 20P

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The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndts federal-plus-state tax rate is 40%. Berndt has no debt. a. Set up an income statement. What is Berndts expected net income? Its expected net cash flow? b. Suppose Congress changed the tax laws so that Berndts depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow? c. Now suppose that Congress changed the tax laws such that, instead of doubling Berndts depreciation, it was reduced by 50%. How would profit and net cash flow be affected? d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?
Ogier Incorporated currently has $800 million in sales, which are projected to grow by 10% in Year 1 and by 5% in Year 2. Its operating profitability ratio (OP) is 10%, and its capital requirement ratio (CR) is 80%? What are the projected sales in Years 1 and 2? What are the projected amounts of net operating profit after taxes (NOPAT) for Years 1 and 2? What are the projected amounts of total net operating capital (OpCap) for Years 1 and 2? What is the projected FCF for Year 2?
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?

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Calculate the APV of the project. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)