Projected annual cash flow before interest and taxes

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Suppose you have a project with a projected annual cash flow before interest and taxes of $6 million, indefinitely. The initial investment of $18 million will be financed with 60% equity and 40% debt.

Your tax rate is 34%, your cost of capital if you were an all-equity firm is 24%, and your usual borrowing rate is 10%.

Your project has been reviewed by your local city government and has been selected to receive municipal funding at a rate of 8%. There will, however, be a flotation cost to this debt of $500,000, which must be expensed immediately and will be paid from the gross proceeds of your debt. Using APV, determine whether to approve this project or not.

Reference no: EM132373583

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