Question $1$

The information below is for Question $1$ and $2$:

ABC is considering investing in a project that has an initial cost of $$560,000.$ The project will earn unlevered free cash flows $($FCFF$)$ of $$96,000$ per year in perpetuity. The

unlevered cost of capital is $20\%$ and the tax rate is $40\%.$ What is the NPV of the unlevered project?

$-$$$80,000$

$$80,000$

$$480,000$

$$400,000$

Question $2$

Continuing on from Question $1$:

ABC is still considering investing in the project with the initial cost of $$560,000$ and that will earn unlevered free cash flows $($FCFF$)$ of $$96,000$ per year in perpetuity. The

unlevered cost of capital is still $20\%$ and the tax rate is $40\%.$

Assume instead of funding with $100\%$ equity, ABC funds the project with $$280,000$ in perpetual debt $($wtih an interest rate of $10\%)$ and the remainder of funding will be with

equity.

What is the NPV of the levered project using the APV method?

$$592,000$

$$512,000$

$$32,000$

$$368,000$