A firm has a project with an NPV of -$52 million.If it has access to risk-free government financing that can create a permanent annual tax shield of $5 million,what is the APV of the project assuming the risk-free interest rate is 6%?

Question

Quizplus · Accepted Answer

APV (Adjusted Present Value) = NPV + PV of tax shield.
To calculate the PV of tax shield, we can use the perpetuity formula:
PV of tax shield = Annual tax shield amount / Discount rate
= 5 million / 0.06
= $83.33 million
Therefore, the APV = -52 + 83.33 = $31.33 million (rounded to $31 million).
So, option C is correct.

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