A project costs $15 million and is expected to produce cash flows of $3 million a year for 10 years. The opportunity cost of capital is 14 percent. If the firm has to issue stock to undertake the project and issue costs are $500,000, what is the project's APV?

Question

Quizplus · Accepted Answer

The APV is the sum of the present value of the project's cash flows and the present value of the tax savings on the issue costs. The present value of the cash flows is $3 million / (1 + 0.14)^1 + $3 million / (1 + 0.14)^2 + ... + $3 million / (1 + 0.14)^10 = $14.835 million. The present value of the tax savings on the issue costs is $500,000 * 0.35 * 1 / (1 + 0.14)^1 = $148,350. Therefore, the APV is $14.835 million + $148,350 = $15 million.

A Project Costs $15 Million and Is Expected to Produce