Consider project to produce solar water heaters

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Reference no: EM131504241

Consider a project to produce solar water heaters. It requires a $10 million investment and offers a level after-tax cash flow of $1.70 million per year for 10 years. The opportunity cost of capital is 11.25%, which reflects the project’s business risk.

a. Suppose the project is financed with $6 million of debt and $4 million of equity. The interest rate is 7.25% and the marginal tax rate is 40%. An equal amount of the debt principal will be repaid in each year of the project's 10-year life. Calculate APV.

b. If the firm incurs issue costs of $600,000 to raise the $4 million of required equity, what will be the APV?

Reference no: EM131504241

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