Therefore, if Hertz uses $600,000 of five-year, 8% debt to
fund the $975,000 purchase, the Adjusted Present Value
(APV) of the project is $ 49,910.74.
(c ).
To determine the maximum price, set the
APV=0 = NPV (All equity) +
NPV(Loan)
0 =
-P + (1-0.40)($300,000)A
5
0.10
+ 0.2727P + $600,000 –
(1 – 0.40)(0.05)($600,000)A
5
0.08
– [$600,000/(1.08)
5
]
0 = -0.7273P +682,341.62 + 600,000 – 71,868.78 – 408,350
0.7273P = 802,122.84
P = 1,102,877.55
Problem 2:
The adjusted present value of a project equals the net present value
of the project under all-equity financing plus the net present value of
any financing side effects.
In the joint venture’s case, the NPV of
financing side effects equals the after-tax present value of cash
flows resulting from the firms’ debt.
APV = NPV(All-Equity) + NPV(Financing Side Effects)
NPV(All-Equity)
NPV
=
-Initial Investment + PV[(1 – T
C
)(Earnings Before
Interest, Taxes, and Depreciation )] + PV(CCA Tax Shield)
Assuming that the company has other assets in the class,
1 0.50(
)
[]
[
]
1
20,000,000 0.25 0.30 1 0.50(0.12)
[
][
]
$3,380,102
0.30 0.12
1 0.12
InvestmentxTaxRatexCCA
DiscountRate
PVCCATS
CCA DiscountRate
DiscountRate
xx
+
=
++
+
==
NPV =
-$20,000,000 + [(1-0.25)($3,000,000)A
20
0.12
] +
3,380,102
= -$20,000,000 + $16,806,248 +
3,380,102