Explain the initial investment in paving equipment

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Triad Corporation has established a joint venture with Tobacco Road Construction, Inc., to build a toll road in North Carolina. The initial investment in paving equipment is $20 million. The equipment will be fully depreciated using the straight-line method over its economic life of five years. Earnings before interest, taxes, and depreciation collected from the toll road are projected to be $3 million per annum for 20 years starting from the end of the first year. The corporate tax rate is 25%. The required rate of return for the project under all-equity financing is 12%. The pre-tax cost of debt (rB) for the joint partnership is 9% per annum. In order to encourage investment in the country's infrastructure, the U.S. government will subsidize the project with a $10 million, 15-year loan at an interest rate of 5% per year. All principal will be repaid in one balloon payment at the end of year 15. What is the Adjusted Present Value (APV) of this project?

Reference no: EM13215799

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