XYZ Limited is considering purchasing a widget maker. The widget maker will result in EBIT of $50,000

per year for 20 years. The widget maker will be depreciated over a 20 year period using straight-line

method, and will have no salvage value. The widget maker will not add/reduce the risk of the firm. XYZ

has cost of unlevered equity of 12%, and pays corporate tax at 40%. Risk free rate of return is 3%.

a. What is the maximum price XYZ should pay for the widget maker?

b. Suppose due to economic reasons provincial government is willing to lend XYZ $120,000 at 2% for

20 years. Only interest will be paid each year. Principal will be paid at the end of the 20th year. Using

APV approach, what is the maximum price XYZ would be willing to pay for the widget maker if

XYZ's cost of debt is 8%?