Consider the following scenario, and value the project described using both APV and WACC:
A project requires $65 million in investment today in order to go ahead. It is expected to produce $9.5 million per year in EBITDA for 10 years. Out of the initial investment, all but $5 million is fully depreciable over 10 years, according to the IRS' MACRS documentation (the remaining $5 million is not depreciable at all). Assume a salvage value of $2.5 million, recovered at the end of year 10. The firm faces a tax rate of 27%. If the firm borrows $35 million from creditors and gets the rest of the investment from equity, the market price of a bond will be $1037.19 (maturing in 10 years with a 6.5% coupon) and the beta on shares will be 1.32 (the risk-free rate is 2.75% and the expected return on the market is 9%). There is no preferred stock.
Step-by-step solutions are required.