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You are evaluating a project that requires an investment of ?$96 today and garantees a single cash flow of $126 one year from now. You decide to use 100% debt? financing, that? is, you will borrow ?$96. The? risk-free rate is 6% and the tax rate is 39%. Assume that the investment is fully depreciated at the end of the? year, so without leverage you would owe taxes on the difference between the project cash flow and the? investment, that? is, ?$30.
a. Calculate the NPV of this investment opportunity using the APV method.
b. Using your answer to part calculate the WACC of the project.
c. Verify that you get the same answer using the WACC method to calculate NPV
d. ?Finally, show that? flow-to-equity method also correctly gives the NPV of this investment opportunity.
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