Reference no: EM132625842

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 firm is 15.8%. Sampa Video, Inc. is planning to run the new line of delivery only for the next 5 years. The following financial information is available regarding the expected cash flows of the new line of delivery (in $ thousands):

                                projected             projected           projected              projected             projected

                                     t1                       t2                           t3                             t4                         t5

NWC                                  0                    0                      0                           0                   0

Capital Expenditure             300               300                   300                         300               300

Depreciation                         200                 225               250                          275             300

Revenue Cost                       180                  360                   585                     840            1125

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?