Consider a project with the following data: The 5-year project requires equipment that costs $80,000. If...

    

Transcribed Image Text:

Consider a project with the following data: The 5-year project requires equipment that costs $80,000. If undertaken, the shareholders will contribute $20,000 cash and borrow $60,000 with an interest-only loan with a maturity of 5 years and annual interest payments. The equipment will be depreciated straight-line to zero over the 5-year life of the project. There will be a pre-tax salvage value of $3,200. There are no other start-up costs at year O. During years 1 through 5, the firm will sell 20,000 units of product at $5; variable costs are $2; there are no fixed costs. Tebe = 8%, requity = 20%, tax rate t= 30% debt-to-equity ratio=3, ry= 2% OCF=- 80,000 OCF₁4 20,000x (5-2) x (1-30 % ) + 16,000 × 30% = 46,800 OCF = 46,800 +3,200 = 50,000 When using the APV methodology, what is the NPV of the depreciation tax shield? $25,777.35 $32,051.52 $97,152.98 O $19,165.01 Consider a project with the following data: The 5-year project requires equipment that costs $80,000. If undertaken, the shareholders will contribute $20,000 cash and borrow $60,000 with an interest-only loan with a maturity of 5 years and annual interest payments. The equipment will be depreciated straight-line to zero over the 5-year life of the project. There will be a pre-tax salvage value of $3,200. There are no other start-up costs at year O. During years 1 through 5, the firm will sell 20,000 units of product at $5; variable costs are $2; there are no fixed costs. Tebe = 8%, requity = 20%, tax rate t= 30% debt-to-equity ratio=3, ry= 2% OCF=- 80,000 OCF₁4 20,000x (5-2) x (1-30 % ) + 16,000 × 30% = 46,800 OCF = 46,800 +3,200 = 50,000 When using the APV methodology, what is the NPV of the depreciation tax shield? $25,777.35 $32,051.52 $97,152.98 O $19,165.01

Answer rating: 100% (QA)

The detailed answer for the above question is provided below Lets solv... View the full answer