Consider a project to produce solar water heaters. It requires a $10 million investment and offers a level after-tax cash flow of $1.71million per year for 10 years. The opportunity cost of capital is 11.45%, which reflects the project's business risk.a. Suppose the project is financed with $5 million of debt and $5 million of equity. The interest rate is 7.55% and the marginal tax rateis 21%. An equal amount of the debt will be repaid in each year of the project's life.Calculate APV. (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations. Round your answer tothe nearest whole number.)Adjusted present valueb. If the firm incurs issue costs of $580,000 to raise the $5 million of required equity, what will be the APV? (Enter your answer indollars, not millions of dollars. Do not round intermediate calculations. Round your answer to the nearest whole number. Negativeamount shoud be indicated by a minus sign.)Adjusted present value

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Asked Jul 6, 2019
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Consider a project to produce solar water heaters. It requires a $10 million investment and offers a level after-tax cash flow of $1.71
million per year for 10 years. The opportunity cost of capital is 11.45%, which reflects the project's business risk.
a. Suppose the project is financed with $5 million of debt and $5 million of equity. The interest rate is 7.55% and the marginal tax rate
is 21%. An equal amount of the debt will be repaid in each year of the project's life.
Calculate APV. (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations. Round your answer to
the nearest whole number.)
Adjusted present value
b. If the firm incurs issue costs of $580,000 to raise the $5 million of required equity, what will be the APV? (Enter your answer in
dollars, not millions of dollars. Do not round intermediate calculations. Round your answer to the nearest whole number. Negative
amount shoud be indicated by a minus sign.)
Adjusted present value
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Consider a project to produce solar water heaters. It requires a $10 million investment and offers a level after-tax cash flow of $1.71 million per year for 10 years. The opportunity cost of capital is 11.45%, which reflects the project's business risk. a. Suppose the project is financed with $5 million of debt and $5 million of equity. The interest rate is 7.55% and the marginal tax rate is 21%. An equal amount of the debt will be repaid in each year of the project's life. Calculate APV. (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations. Round your answer to the nearest whole number.) Adjusted present value b. If the firm incurs issue costs of $580,000 to raise the $5 million of required equity, what will be the APV? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations. Round your answer to the nearest whole number. Negative amount shoud be indicated by a minus sign.) Adjusted present value

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Step 1

a.

Calculation of Present Value of Interest Tax Shield:

Excel Spreadsheet:

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A C E 1Year Amount of Debt Interest Tax Shield FVIF @ 7.55%| PV of Interest Tax Shield $5,000,000 $4,500,000 $4,000,000 S79,275.00 S71,347.50 $63,420.00 $73,709.90 2 1 1.0755 $61,681.93 S50,979.43 $41,475.60 S33,054.87 3 2 1.1567 1.2440 S3,500,000 S3.000,000 S2,500,000 $2,000,000 S1,500,000 S1,000,000 S500,000 $55.492.50 5 1.3380 6 5 $47,565.00 S39,637.50 S31,710.00 $23,782.50 $15,855.00 S7,927.50 Total PV of Interest Tax Shield 1.4390 7 6 1.5476 S25,612.02 1.6645 $19,051.24 8 7 1.7901 9 8 $13,285.39 $8,235.17 $3,828.53 S330,914.07 10 1.9253 9 11 10 2.0706 12 et

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Step 2

Excel Workings:

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C D E Year Amount of Debt Interest Tax Shield FVIF@ 7.55% PV of Interest Tax Shield 5000000 =B2-(5000000/10)B3*7.55%*21% -B3- (5000000/10) B4*7.55%*21% =B4- (5000000/10)B5*7.55%*21% -B5-(5000000/10)B6*7.55%*21% =B6-(5000000/10)B7*7.55%*21% =B7-(5000000/10) B8*7.55%*21% -B8-(5000000/10)B9*7.55%*21% =B9-(5000000/10) B10*7.55%*21% | =(1+7.55%^A10 C10/D10 =B10-(5000000/10) |B11*7.55%*21% |=(1+7.55%^A11 |=C11/D11 (1+7.55%)^A2 C2D2 (1+7.55% )^A3 C3 /D3 (1+7.55%) A4 C4 /D4 (1+7.55%)^A5 C5/D5 (1+7.55%)^A6 C6/D6 (1+7.55%)^A7 C7/D7 (1+7.55%)^A8 C8/D8 - (1+7.55%)^A9 C9/D9 =B2*7.55%*21% 2 1 3 2 4 3 5 4 6 5 7 6 8 7 9 8 10 9 11 10 |-SUM(E2E11) 12 Total PV of Interest Tax Shield T1

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Step 3

Calculation of NPV:

Excel Spreadsheet:

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D Cash Flows FVIF @ 11.45%|PV of Cash Flows ($10,000,000) $1,534,320.32 $1,376,689.39 S1,235,252.93 $1,108,347.18 $994,479.30 $892,309.82 $800,636.90 S718,382.14 $644,577.97 S578,356.18 1 Year |(S10,000,000)| S1,710,000 $1,710,000 $1,710,000 2 0 1.0000 1.1145 1 4 2 1.2421 5 3 1.3843 $1,710,000 S1,710,000 $1,710,000 6 4 1.5428 1.7195 5 8 6 1.9164 $1,710,000 S1,710,000 S1,710,000 2.1358 7 10 2.3803 11 9 2.6529 12 S1,710,000 2.9567 10 ($116,647.88) 13 Net Present Vaue re

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