XYZ Company is considering a new project with a cost of $25,000 and a life of 5 years. The project’s yearly pretax operating cash revenues and expenses are $20,000 and $9,000, respectively. The additional depreciation would be $10,000 per year. The net proceeds from a new debt issue would be $5,000, with a yield of 10% that is expected to remain constant over the life of the project. The corporate tax rate is 35%, and the risk-free and market rates of return are 6% and 12%, respectively. The firm’s cost of equity is 15%. Debt will be repaid at the end of the five-year period. Using the above information, calculate the net present value of the new proposed project based upon: (a) Equity residual, (b) After-tax WACC, (c) Arditti-Levy WACC, and (d) Myers’ APV (M&M proposition with corporate taxes).

Using the following information: I = $25,000; Rt = $20,000; N = 5 years; Ct = $9,000; dept = $5,000; τC = 35%; New Debt = $5,000; rt = 10%; kE = 15%; w = (5,000/25,000) = 0.20; Rf = 6%; and Rm = 12%, we calculate the NPVs for all four methods. They are as follows:

Please calculate the following alternative cash flow:

1. After tax operating cash flow

2. After Tax Debt Cash Flows

3. After tax equity cash flows

4. Please use After Tax WACC Method to calculate NPV

5. Please use Myers Method to calculate NPV

Answer rating: 100% (QA)

1 After tax operating cash flow Annual operating cash flow before taxes Revenue Expenses 20000 9000 ... View the full answer