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Npv of the depreciation tax shield

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Reference no: EM131104999

Use the following information to answer the next two questions.

i = rdebt = 7%

Ku= rasset = 15%

Kl=requity = 24.9%

K= rWACC = 11.20%

Tax rate = 40%

The 5-year project requires equipment that costs $200,000. If undertaken, the shareholders will contribute $80,000 cash and borrow $120,000 with an interest-only loan with a maturity of 5 years and annual interest payments. The equipment will be depreciated straight-line to zero over the 5-year life of the project.

(a) When using the APV methodology, what is the NPV of the depreciation tax shield?

(b) When using the APV methodology, what is the NPV of the interest tax shield?

Reference no: EM131104999

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