MVP, Inc., has produced rodeo supplies for over 20 years. The company currently has a debt-to-equity ratio

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MVP, Inc., has produced rodeo supplies for over 20 years. The company currently has a debt-to-equity ratio of 50% and is in the 40% tax bracket. The required return on the firm’s levered equity is 16%. MVP is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows:

YEAR .....CASH FLOW

0 ........-$21,000,000

1 ........$6,900,000

2 .........$11,000,000 

3 ........$9,500,000


MVP has arranged a $7 million debt issue to partially finance the expansion. Under the loan, the company would pay interest of 9% at the end of each year on the outstanding balance at the beginning of the year. The firm would also make year-end principal payments of $2,333,333 per year, completely retiring the issue by the end of the third year. Using the Adjusted Present Value (APV) method, determine whether or not MVP should proceed with the expansion.

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Corporate Finance

ISBN: 978-0077861759

10th edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe

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