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A small video chain is deciding whether to engage in a new line of delivery business, which implies setting up a page where customers could choose movies based on available in-store inventory and pick a time for delivery. The purpose of this analysis is to obtain an estimate of the net present value of this project, which requires an upfront investment of $800,000. Part of this amount will come from debt of $750,000 (held in perpetuity). Currently, Sampa Video, Inc. is unlevered. Assume that the cost of debt is 6.8%, the corporate tax is 40% and the return required by equity investors in the all-equity rm is 15.8%. Sampa Video, Inc. is planning to run the new line of delivery only for the next 5 years. The following nancial information is available regarding the expected cash ows of the new line of delivery (in $ thousands):
Projected (t=1)
Projected (t=2)
Projected (t=3)
Projected (t=4)
Projected (t=5)
ANWC
0
300
225
360
Capital Expenditures
Depreciation
200
250
275
Revenue - Costs
180
585
840
1,125
Questions:
Question 1. Calculate the unlevered present value
Question 2. Calculate the present value of the expected interest tax shields
Question 3. Calculate the APV.
Question 4. Why is APV a preferable method to WACC in this situation? How do their assumptions differ?
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