A project costs $14 million and is expected to produce cash flows of $4 million a year for
15 years. The opportunity cost of capital is 20%. If the firm has to issue stock to undertake the project and issue costs are $1 million, what is the project's APV?
A) $3.7 million
B) $4.5 million
C) $4.7 million
D) $3.0 million

Question

Quizplus · Accepted Answer

The Adjusted Present Value (APV) is calculated by finding the Net Present Value (NPV) of the project without considering the financing costs and then adjusting for the costs of issuing stock. First, calculate the NPV of the cash flows using the opportunity cost of capital (20%). Then, subtract the issue costs ($1 million) from the NPV to get the APV. The correct APV is $3.7 million.

A Project Costs $14 Million and Is Expected to Produce