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# Investment Management

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(The following information relates to Questions 28 to 31)

A project's after-tax operating cash inflows are \$175,000 per year for each of the next four years. The initial investment is \$500,000. The unlevered cost of equity capital is 15%. The risk-free interest rate is 7%

28. What is the base-case NPV?
A) \$750
B) -\$375
C) \$1,098
D) -\$653

29. If the project is financed entirely with stock issues, the flotation costs are equal to 6% of the gross proceeds. What is the project's adjusted present value (APV)?
A) \$31,540
B) -\$32,290
C) -\$26,695
D) \$616

30. Assume that the project is financed entirely with debt issues. The interest rate is 11% and the firm is in a 30% tax bracket. While the firm only has to make annual interest payments, the loan will be paid back in total when the project ends. What is the APV?
A) \$55,000
B) \$26,315
C) \$46,733
D) -\$62,810

31. If the project is financed entirely with a special loan, the subsidized rate will only be 4% although the fair market rate is 10%. Under this loan, the firm makes annual year-end interest payments, repaying the principal at the end of four years. How much are the savings associated with this subsidy?
A) \$95,100
B) \$34,150
C) \$63,400
D) \$75,000

#### Solution Preview

Base case NPV = 175000 PVIFA (15%, 4) -500000
= -\$ 378.79
i.e. \$ 375 ...