A firm's investments cost $100,000 and are expected to return $118,000 before taxes at the end of 1 year. The firm is financed with $30,000 debt at an expected rate of 8%. The firm pays taxes at the marginal rate of 40%, and the appropriate cost of capital is 12%.
-Refer to the information above. What is the firm's adjusted present value (APV)?

Question

Quizplus · Accepted Answer

First we need to find the net present value (NPV) of the investment without considering any financing:
NPV = -$100,000 + ($118,000/(1+0.12)) = $5,357.14
Then we need to calculate the present value of the tax shield from the debt financing:
PV of tax shield = $30,000 x 0.08 x 0.4/(1-1/(1+0.12)^1) = $4,570.57
Finally, we can calculate the adjusted present value (APV):
APV = NPV + PV of tax shield = $5,357.14 + $4,570.57 = $9,927.71
However, this answer is not given as a choice. The closest answer is A, but it is off by a significant amount. Therefore, there may be a mistake in the given choices or in the calculations.

A Firm's Investments Cost $100,000 and Are Expected to Return