i = r_debt = 6% OCF₀ = −$100,000 K_u = r_assets = 12% OCF_1-4= $39,800 = 25,000 × ($5 − $3) × (1 − 0.34) + $20,000 × 0.34
K_l = r_equity = 27.84% OCF₅ = $43,100 = $39,800 + $5,000 × (1 − 0.34) K = r_WACC = 8.74% π = Tax rate = 34% Debt-to-equity ratio = 4 Risk-free rate = 2%
The 5-year project requires equipment that costs $100,000.If undertaken,the shareholders will contribute $20,000 cash and borrow $80,000 at 6 percent with an interest-only loan with a maturity of 5 years and annual interest payments.The equipment will be depreciated straight-line to zero over the 5-year life of the project.There will be a pre-tax salvage value of $5,000.There are no other start-up costs at year 0.During years 1 through 5,the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs.
What is the NPV of the project using the APV methodology?

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The Answer of i = r_debt = 6% OCF₀ = −$100,000 K_u = r_assets = 12% OCF_1-4= $39,800 = 25,000 × ($5 − $3)× (1 − 0.34)+ $20,000 × 0.34 K_l = r_equity = 27.84% OCF₅ = $43,100 = $39,800 + $5,000 × (1 − 0.34)K = r_WACC = 8.74% π = Tax rate = 34% Debt-to-equity ratio = 4 Risk-free rate = 2% The 5-year project requires equipment that costs $100,000.If undertaken,the shareholders will contribute $20,000 cash and borrow $80,000 at 6 percent with an interest-only loan with a maturity of 5 years and annual interest payments.The equipment will be depreciated straight-line to zero over the 5-year life of the project.There will be a pre-tax salvage value of $5,000.There are no other start-up costs at year 0.During years 1 through 5,the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs. What is the NPV of the project using the APV methodology?

I = Rdebt = 6% OCF0 = −$100,000 Ku =

I = R_debt = 6% OCF₀ = −$100,000 K_u =