There are two ways of incorporating the effects of financing into valuing an investment project, namely by adjusting the weighted average cost of capital (adjusted WACC) and by adjusting the present value of the business cashflow (APV). 

Discuss two key differences between the Adjusted Weighted Average Cost of Capital (adjusted WACC) and Adjusted Present Value (APV). 

You are considering a project which requires an initial investment of RM15 million and which will generate cash flow of RM3 million a year for 10 years. The firm's weighted average cost of capital is 16% and the opportunity cost of capital at this pertinent debt level is 14%. The firm has to issue debt to undertake this project. You have estimated that you will have to pay the investment bankers RM500,000 to facilitate the issuance of the debt. The present value of the interest tax shield is RM2million.

(i) Briefly describe the meaning of the "Present Value of the Interest Tax Shield" and how it is computed. 

(ii) Determine the project's baseline Net Present Value (NPV) and Adjusted Present Value (APV). 

(iii)The baseline NPV and the APV values respectively, discuss and justify whether you would recommend pursuing this project. 

Answer rating: 100% (QA)

Two key differences between Adjusted Weighted Average Cost of Capital adjusted WACC and Adjusted Present Value APV are Incorporating Financing Effects ... View the full answer