A firm's investments cost $5,000 today and are expected to return $6,250 before taxes at the end of one year. The firm is financed with $3,000 in debt that promises a return of 18%. The expected return on the debt is 10%. The firm pays taxes at a marginal rate of 30%, and the appropriate cost of capital is 12%.
-Refer to the information above. Calculate the firm's adjusted present value (APV). Round your answer to the nearest dollar.

Question

Quizplus · Accepted Answer

The APV is calculated by adding the NPV of the project as if it were all-equity financed to the present value of the tax shield from debt. The NPV of the project is calculated using the cost of capital (12%) and the after-tax cash flow. The tax shield is calculated using the debt amount, interest rate, and tax rate.

A Firm's Investments Cost $5,000 Today and Are Expected to Return