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Unformatted text preview: Session 3 – Solutions 17-2. The adjusted present value (APV) of a project equals the net present value of the project if it were funded completely by equity plus the net present value of any financing side effects. In this case, the NPV of financing side effects equals the after- tax present value of the cash flows resulting from the firm’s debt, so: APV = NPV(All-Equity) + NPV(Financing Side Effects) So, the NPV of each part of the APV equation is: NPV(All-Equity) NPV = –Purchase Price + PV[(1 – t C )(EBTD)] + PV(Depreciation Tax Shield) Since the initial investment of $2.4 million will be fully depreciated over four years using the straight-line method, annual depreciation expense is: Depreciation = $2,400,000/4 Depreciation = $600,000 NPV = –$2,400,000 + (1 – 0.30)($850,000)PVIFA 4,13% + (0.30)($600,000)PVIFA 4,13% NPV (All-equity) = – $94,784.72 NPV(Financing Side Effects) The net present value of financing side effects equals the aftertax present value of cash flows...
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This note was uploaded on 02/14/2011 for the course FINANCE 620 taught by Professor Halstead during the Spring '09 term at UMBC.
- Spring '09
- Net Present Value