Digital Organics (DO) has the opportunity to invest $1 million now ( ) and expects after-tax returns of $600,000 in and $700,000 in . The project will last for two years only. The appropriate cost of capital is 12 percent with all-equity financing, the borrowing rate is 8 percent, and DO will borrow $300,000 against the project. This debt must be repaid in two equal installments. Assume debt tax shields have a net value of $.30 per dollar of interest paid. Calculate the project's APV using the procedure followed in Table19.1.

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Debt Outstanding at Start of Year Interest Tax Shield Present Value of Tax Shield Year Interest $5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 $400 360 320 280 $140 $129.6 126 108.0 112 88.9 72.0 98 240 84 57.2 200 70 44.1 160 56 32.6 42 22.7 120 80 28 14.0 40 6.5 14 Total $576