Saturn, Inc., an all-equity firm is considering a $3.0 million investment that will be depreciated according to
Question:
Saturn, Inc., an all-equity firm is considering a $3.0 million investment that will be depreciated according to the straight-line method over its six-year life. The project is expected to generate additional revenue of $1,000,000 per year for six years along with cash expenses of $300,000 per year. The investment will not change the risk level of the firm. The company can obtain a six-year, 8% annual interest loan to finance the project. All principal will be repaid in one balloon payment at the end of the sixth year. If the company financed the project entirely with equity, the firm’s cost of capital would be 12%. When the firm borrows it will incur floatation costs of $30,000 to be paid immediately but amortized for tax purposes over the life of the loan. The corporate tax rate is 25%. Using the APV method, describe all of the cash flows associated with the analyzing the decision. You do not have to solve for the APV value, just identify all of the cash flows along with the appropriate discount factors (PVIFA or PVIF). Please create one equation for representing the value of the unlevered project and another equation representing the value of the financing effects.
