Task: A project's after-tax operating cash inflows are $175,000 per year for each of the next four years. The initial investment is $500,000. The unlevered cost of equity capital is 15%. The risk-free interest rate is 7%
Q1. What is the base-case NPV?
A) $750
B) -$375
C) $1,098
D) -$653
Q2. If the project is financed entirely with stock issues, the flotation costs are equal to 6% of the gross proceeds. What is the project's adjusted present value (APV)?
A) $31,540
B) -$32,290
C) -$26,695
D) $616
Q3. Assume that the project is financed entirely with debt issues. The interest rate is 11% and the firm is in a 30% tax bracket. While the firm only has to make annual interest payments, the loan will be paid back in total when the project ends. What is the APV?
A) $55,000
B) $26,315
C) $46,733
D) -$62,810
Q4. If the project is financed entirely with a special loan, the subsidized rate will only be 4% although the fair market rate is 10%. Under this loan, the firm makes annual year-end interest payments, repaying the principal at the end of four years. How much are the savings associated with this subsidy?
A) $95,100
B) $34,150
C) $63,400
D) $75,000