Aspen Plowing, Inc., is considering investing in a new snowplow truck costing $30,000. The truck is likely to provide after-tax incremental operating cash flows of $10,000 per year for six years. The unlevered cost of equity capital for the firm is 16 percent The company intends to finance the project with 60 percent debt, bearing an interest rate of 12 percent. The loan will be repaid in equal annual principal payments at the end of each of the six years. Flotation costs (in present value terms) on financing amount to $1,000, and the company is in a 30 percent tax bracket.
a. What is the adjusted present value (APV) of the project? Is the project acceptable?
b. What would happen if expected after-tax incremental operating cash flows were $8,000 per year instead of $10,000?