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Taggart Transcontinental is considering a $250 million investment to launch a new rail line. The project is expected to generate a free cash flow of $32 million per year, and its unlevered cost of capital is 8%. Taggart's marginal corporate tax rate is 35%.
-Assume that to fund the investment Taggart will take on $150 million in permanent debt with the remainder of the investment funded through issuance of new equity.Assuming Taggart will incur a 2% underwriting fee on the new debt issue and a 5% underwriting fee on the issuance of new equity,the NPV of Taggart's new rail line is closest to:

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Quizplus · Accepted Answer

A) NPV = V^L - Investment = V^U + T_cD - Investment - (1 - T_c)issuance cost 11ea7e54_8cd1_e5ea_ba34_310a2434db13_TB1620_00 $150 million - $250 million - (1 - 35%)(2%)($150) (Note that equity issuance costs are not tax deductible.)

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