Question

Joshua Industries is considering a new project with revenue of $478,000 for the indefinite future. Cash costs are 68 percent of the revenue. The initial cost of the investment is $685,000. The tax rate is 21 percent and the unlevered cost of equity is 14.2 percent. The firm is financing $200,000 of the project cost with debt. What is the adjusted present value of the project?

Answer 1

Answer:

adjusted present value $207974.64

Step-by-step explanation:

Formula for adjusted present value (APV)

APV =  Net present value +  presnt value of tax

step 1  - After tax cash flow

cash inflow  - $478,000

cash cost  $= .68 \times 478,000 = 325,040.00$

Profit  = 478000 - 325,040.00 = 152,960.00

Tax at 21% = 32121.6

after tax cash flow is 120838.4

step 2 Net present value

Net present value $=\frac{cash\ flow}{cost\ of\ equity} - initial\ cost$

                              $= \frac{120838.4}{0.142} - 685000$

                              = $165974.64

step 3 Present value of tax

present value$=  Debt \times tax\ rate$

                        $= 200000\times 0.21 = 42000$

step 4 adjusted present value

APV = Net present value  +  present value of tax

        = 165974.64 + 42000 = $207974.64