Daniel Kaffe, CFA of Kendrick Enterprises, is evaluating a 10-year, 8 percent loan with gross proceeds of $5,850,000. The interest payments on the loan will be made annually. Flotation costs are estimated to be 2.5 percent of gross proceeds and will be amortized using a straight-line schedule over the 10-year life of the loan. The company has a tax rate of 40 percent, and the loan will no increase the risk of financial distress for the company. a) Calculate the NPV of the loan excluding flotation costs b) Calculate the NPV of the loan including flotation costs
Triad Corporation has established a joint venture with Tobacco Road Construction, Inc., to build a toll road in North Carolina. The initial investment in paving equipment is $80 million. The equipment will be fully depreciated using the straight-line method over its economic life of 5 years. Earnings before interest, taxes and depreciation collected from the toll road are projected to be $12.1 million per year for 20 years starting from the end of the first year. The corporate tax rate is 35 percent, The required rate of return for the project under all-equity financing is 13 percent. The pretax cost of debt for the joint partnership is 8.5%. To encourage investment in the country’s infrastructure, the US government will subsidize the project with $25 million, 15-year loan at an interest rate of 5 percent per year. All principal will be repaid in one balloon payment at the end of Year 15. What is the adjusted present value of the project?