Show your calculations.
a. Explain in a few words the formula below:
APV = NPV + NPVF
b. Consider the following project with the characteristics below:
- Cash inflows per year (sales) $ 380,000 for the indefinite future.
- Cash costs 70% of sales.
- Initial investment $ 390,000
- Tc corporate tax rate 32%
- Ro cost of capital for a project of an all equity firm = 25%
Calculate NPV without debt.
Should the project go ahead?
c. Later imagine the firm finances the project with $ 240,000.
Calculate now the APV of the project under leverage.
Should the project be accepted, and why?