Consider another perpetual project like the crusher described in Section 19-1. Its initial investment is $1,000,000, and the expected cash inflow is $95,000 a year in perpetuity. The opportunity cost of capital with all-equity financing is 10%, and the project allows the firm to borrow at 7%. The tax rate is 35%.

Use APV to calculate this project's value.
a. Assume first that the project will be partly financed with $400,000 of debt and that the debt amount is to be fixed and perpetual.
b. Then assume that the initial borrowing will be increased or reduced in proportion to changes in the market value of this project.
Explain the difference between your answers to (a) and (b).

Cash and marketable securities Accounts receivable Inventory $ 1,500 120,000 125,000 $246,500 302,000 $ 75,600 62,000 $137,600 Short-term debt Accounts payable Current liabilities Current assets Long-term debt Deferred taxes Shareholders' equity Total 208,600 45,000 246,300 $637,500 Property, plant, and equipment Other assets Total 89,000 $637,500