Company XYZ is considering expanding its capacity with a capital outlay of $25 million. The purchased...

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Company XYZ is considering expanding its capacity with a capital outlay of $25 million. The purchased equipment would be depreciated over its 4-year life to its zero salvage value. The investment is projected to increase pre-tax net revenue (revenue less cash costs, such as labor, materials, etc) by $7 million in Year 1, a level that would grow at 5%/year thereafter for the next 3 years. The company pays tax at a 30% rate and considers an 8% asset (unlevered equity) discount rate to be appropriate for this project. 1. a) If XYZ finances the entire project cost using internally available equity, should it go forward with the expansion? 2. b) Suppose instead that XYZ financed the project using 50% internal equity, and 50% 4-year unamortized debt issued at the (unsubsidized) rate of 5%? What is the project APV? Company XYZ is considering expanding its capacity with a capital outlay of $25 million. The purchased equipment would be depreciated over its 4-year life to its zero salvage value. The investment is projected to increase pre-tax net revenue (revenue less cash costs, such as labor, materials, etc) by $7 million in Year 1, a level that would grow at 5%/year thereafter for the next 3 years. The company pays tax at a 30% rate and considers an 8% asset (unlevered equity) discount rate to be appropriate for this project. 1. a) If XYZ finances the entire project cost using internally available equity, should it go forward with the expansion? 2. b) Suppose instead that XYZ financed the project using 50% internal equity, and 50% 4-year unamortized debt issued at the (unsubsidized) rate of 5%? What is the project APV?

Answer rating: 100% (QA)

a To determine whether XYZ should go forward with the expansion using internally available equity we ... View the full answer