Consider a project to produce solar water heaters. It requires 10M euros of initial investment and offers a level after tax cash flow of 1,75M per...
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Consider a project to produce solar water heaters. It requires 10M

euros of initial investment and offers a level after tax cash flow of 1,75M per year for 10 years. The opportunity cost of capital is 12% which reflects the porject's business risk.
a. Suppose the project is financed with 5M euros of debt and 5M euros of equity. The interest rate is 8% and marginal tax rate is 35%. The debt will be paid off in equal installments over the project's 10 year life. Calculate APV.
b. How does APV change if the firm incurs issue costs of 400000 euros to raise the 5M of required equity?

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