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Use the apv method to value the investment

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An all-equity firm is pursuing a $2.9 million investment in a depreciable asset. The asset will be depreciated using the straight-line method over its 5 year life. The investment is expected to generate earnings before taxes and depreciation of $950,000 per year for five years. The firm can obtain a five-year, non-amortizing loan at a rate of 9.6 percent to fully finance the project. The entire principal of the loan will be repaid in a balloon payment at the end of the fifth year while interest payments on the loan will be made at the end of each year. The firm's cost of unlevered equity is 12 percent and it faces a tax rate of 23 percent.

Problem 1: Use the APV method to value the investment.

Reference no: EM132987359

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