Reference no: EM13934603
MVP Inc has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 50% and is in the 40% tax bracket. The required return on the firm’s levered equity is 16%. MVOP is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows (thus, not including any interest expense):
Year Cash Flow 0 -18,000,000
Year Cash Flow 1 5,700,000
Year Cash Flow 2 9,500,000
Year Cash Flow 3 8,800,000
The company has arranged a $9.3M debt issue to partially finance the expansion. Under the loan, the company would pay interest of 9% at the end of each year on the outstanding balance at the beginning of the year. The company would also make year-end principal payments of $3.1M per year, completely retiring the issue by the end of the third year. Using the adjusted present value method, should be company proceed with the expansion?
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: MVP Inc has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 50% and is in the 40% tax bracket. The required return on the firm’s levered equity is 16%. MVOP is planning to expand its production capacity. Us..
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