A firm has a project with a NPV of -$52 million. If they have access to risk free government financing that can create an annual tax shield of $5 mil, what is the APV of the project assuming the risk free interest rate is 6%?
A) -$52 mil
B) $5 mil
C) $31 mil
D) $83 mil

Question

Quizplus · Accepted Answer

The APV (Adjusted Present Value) is calculated by adding the NPV of the project to the present value of the financing side effects. The tax shield is $5 million annually, and the present value of this perpetuity is $5 million / 0.06 = $83.33 million. Therefore, APV = -$52 million + $83.33 million = $31.33 million, which rounds to $31 million.

A Firm Has a Project with a NPV of -$52