Knotts, Incorporated, an all-equity firm, is considering an investment of $1.81 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $607,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 8.7 percent loan to finance the project from a local bank. All principal will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $57,000 in flotation fees, which will be amortized-over the four-year life of the loan. If the company financed the project entirely with equity, the firm's cost of capital would be 12 percent. The corporate tax rate is 21 percent. Using the adjusted present value method, calculate the APV of the project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) APV
Knotts, Incorporated, an all-equity firm, is considering an investment of $1.81 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $607,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 8.7 percent loan to finance the project from a local bank. All principal will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $57,000 in flotation fees, which will be amortized-over the four-year life of the loan. If the company financed the project entirely with equity, the firm's cost of capital would be 12 percent. The corporate tax rate is 21 percent. Using the adjusted present value method, calculate the APV of the project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) APV
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 17P
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Vijay
Transcribed Image Text:Knotts, Incorporated, an all-equity firm, is considering an investment of $1.81 million that
will be depreciated according to the straight-line method over its four-year life. The
project is expected to generate earnings before taxes and depreciation of $607,000 per
year for four years. The investment will not change the risk level of the firm. The
company can obtain a four-year, 8.7 percent loan to finance the project from a local
bank. All principal will be repaid in one balloon payment at the end of the fourth year.
The bank will charge the firm $57,000 in flotation fees, which will be amortized-over the
four-year life of the loan. If the company financed the project entirely with equity, the
firm's cost of capital would be 12 percent. The corporate tax rate is 21 percent. Using the
adjusted present value method, calculate the APV of the project. (Do not round
intermediate calculations and enter your answer in dollars, not millions of dollars,
rounded to 2 decimal places, e.g., 1,234,567.89)
APV
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