Answer:
D. $93,940.85
Explanation:
Cash inflows (Ci) = $478,000
Cash costs (Cc) = 0.68 of Ci
Initial investment (I) = $685,000
Tax rate (r) = 0.34
Unlevered cost of equity (Ue) = 0.142
Amount financed with cost of debt (D) = $200,000
Earnings after taxes (E) are given by:
[tex]E = C_c(1-C_i)(1-r)\\E=\$478,000*(1-0.68)*(1-0.34)\\E=\$100,953.60[/tex]
Net present value is given by the earnings adjusted by the unlevered cost of equity minus the initial investment:
[tex]NPV = \frac{E}{U_e} -I\\NPV = \frac{\$100,953.60}{0.142} -\$685,000\\NPV=\$25,940.85[/tex]
The adjusted present value (APV) is given by the NPV added to the present value of the cost of debt financing:
[tex]APV =NPV+(D*r)\\APV =\$25,940.85 +(\$200,000*0.34)\\APV = \$93,940.85[/tex]
