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Piano Tuners Unlimited: Net Present Value Calculation

Question 5
Piano Tuners Unlimited is considering a promotional campaign at cost $6,000,000. The resultant after-tax cash flows would be $500,000 per year in the absence of debt, and the appropriate discount rate for an unlevered PTU would be 7.5%. However, PTU will issue $1,000,000 of perpetually outstanding risk-free debt paying the risk-free rate of 4.5%. There are also net agency benefits of debt with present value $80,000. PTU faces a corporate tax rate of 34%. What is the NPV of this campaign?

a. -144,667
b. 1,086,667
c. 1,441,429
d. 1,492,898
e. None of the above are within $1,000 of the correct NPV

Solution Preview

Piano Tuners Unlimited is considering a promotional campaign at cost $6,000,000. The resultant after-tax cash flows would be $500,000 per year in the absence of debt, and the appropriate discount rate for an unlevered PTU would be 7.5%. However, PTU will issue $1,000,000 of perpetually ...

Solution Summary

NPV Calculation using equations.

$2.19