This question provides a foundation for the development of a spreadsheet model that can be used for any capital budgeting decision like the one that we will explore in the Imprimante Case Study.

Part A Company J is considering a project with a 4-year lifespan. The initial cash flow estimate is $125 million in the first year increasing by $125 million in each of the years 2 through 4. To begin the project, the company will need to invest $1 billion dollars. Company J would like to cover the initial investment amount with existing internal resources and thereby not borrow. As such it remains an all-equity firm. The unlevered cost of its equity is 10%, similar to other firms in the industry sector. There will be no terminal value of significance at the end of year 4. Using the domestic APV equation from Chapter 18 and noted below, construct a spreadsheet model to determine whether it makes sense for Company J to proceed with this project. Please review the example for an APV model that was introduced in the lecture when developing your answer.

Complete the following tables. Round your answers to the nearest dollar.

Parameters Symbol Value

Initial Outlay C0 Answer

Unlevered Equity Cost % KU Answer ____%

Years Project Life T Answer

Terminal Value TVT Answer

0 1 2 3 4

Initial Outlay Answer 0____

Cash Flows ____Answer 1 Answer ____2 Answer 3_______ Answer 4_____

Discounted Cash Flows Answer 1____ Answer 2____ Answer 3____ Answer 4_____

APV = $_____Answer

Based on the APV, would you recommend this project?

Part B: Now, imagine that Company J finances the project with $600,000,000 of debt at 8%. As such the company becomes a levered firm due to its acquisition of debt. What do the debt and related interest expense mean for the APV of the project if the tax rate is 40%? Update your spreadsheet model from above to demonstrate the effect of this debt on your decision. Complete the following tables. Round your answers to the nearest dollar.

Parameters Symbol Value

Initial Outlay C0 Answer_____

Unlevered Equity Cost % KU Answer_____ %

Years Project Life T Answer_____

Terminal Value TVT Answer______

Amount Borrowed Answer_____ Tax Rate % Answer_____ % Interest Rate % id Answer_____ %

0 1 2 3 4

Initial Outlay Answer______

Cash Flows Answer1____ Answer 2_____ Answer 3____ Answer 4_____

Discounted Cash Flows Answer 1______ Answer 2______ Answer 3_____ Answer 4_____

Interest Payments Answer 1______ Answer 2_____ Answer 3_____ Answer 4_____

Interest Tax Shield Answer 1 _____ Answer 2_____ Answer 3_____ Answer 4_____

Discounted Tax Shield Answer 1_____ Answer 2_____ Answer 3______ Answer 4______

APV = $ ______Answer

Based on the APV including the loan, would you recommend this project? Y/N