Expansion of production capacity by investing in project

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Reference no: EM13946976

ABC Corp. is considering expansion of its production capacity by investing in a project with the following unlevered cash flows (UCF): Year 0: -$30 million Year 1: +$10 million Year 2: +$8 million Year 3 and all future years: +$5 million ABC Corp. will finance this expansion both with internal cash and by selling $10 million in bonds. The bonds pay interest of 10%. Although the current expected return on ABC’s stock is not known, it is known that the expected return on its stock would be 15% if the firm did not have any debt. The firm is expected to maintain a current debt-equity ratio of 1/2 for the foreseeable future. The corporate income tax rate is 30%. Ignoring the costs of financial distress and issue costs, calculate the net present value of this project using the Flow-To-Equity (FTE) approach.

Reference no: EM13946976

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