Problems
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Skill-Building Problems.
1. A firm has the opportunity to do a one-shot project. It requires a date 0 initial outlay for new
investment of $250,000. During the initial five-years, it will generate the following before-tax
cash flows: date 1 = $380,000, date 2 = $430,000, date 3 = $520,000, date 4 = $460,000, date 5
= $280,000, and $120,000 each year thereafter. The project’s tax rate is 36.0%, it’s unlevered cost
of capital is 11.6%, and the riskfree rate (= cost of debt) is 3.7%. The company has precommitted
to a particular quantity of debt on the following dates to support this project: date 0 = $130,000,
date 1 = $220,000, date 2 = $270,000, date 3 = $240,000, date 4 = $150,000, and $70,000 each
year thereafter. What is the project’s NPV as calculated using the APV method? What is the
present value of future cash flows to both debt and equity?
2. Given the same firm and same project as problem 1, calculate the project’s NPV using the Flows
To Equity method. Compare this result to the APV result. On each date, calculate the present
value of future cash flows to both debt and equity. Verify that this result is the same as the APV
case.
3. Given the same firm and same project as problem 1 and 2, calculate the project’s NPV using the
Weighted Average Cost of Capital method. Compare this result to the APV and FTE results. On
each date, calculate the present value of future cash flows to both debt and equity. Verify that this
result is the same as the APV and FTE cases.
Live In-class Problems.
4. Given the partial Adjusted Present Value spreadsheet ThreeapZ.xls, do steps 5 Tax Shield and 6
Present Value of Future Tax Shield and the first part of step 7 NPV of the Project and PV of
Future Cash Flows.
5. Given the partial Flows To Equity spreadsheet ThreeftZ.xls, do steps 5 Present Value of Future
FTE and the first two parts of step 6 Initial Outlay from Shareholders, NPV of the Project,
and PV of Future Cash Flows.
6. Given the partial Weighted Average Cost of Capital spreadsheet ThreewaZ.xls, do steps 2
Equity and Debt Weights and 3 WACC.
Skill-Building Problems.
1. A firm has the opportunity to do a one-shot project. It requires a date 0 initial outlay for new
investment of $250,000. During the initial five-years, it will generate the following before-tax
cash flows: date 1 = $380,000, date 2 = $430,000, date 3 = $520,000, date 4 = $460,000, date 5
= $280,000, and $120,000 each year thereafter. The project’s tax rate is 36.0%, it’s unlevered cost
of capital is 11.6%, and the riskfree rate (= cost of debt) is 3.7%. The company has precommitted
to a particular quantity of debt on the following dates to support this project: date 0 = $130,000,
date 1 = $220,000, date 2 = $270,000, date 3 = $240,000, date 4 = $150,000, and $70,000 each
year thereafter. What is the project’s NPV as calculated using the APV method? What is the
present value of future cash flows to both debt and equity?
2. Given the same firm and same project as problem 1, calculate the project’s NPV using the Flows
To Equity method. Compare this result to the APV result. On each date, calculate the present
value of future cash flows to both debt and equity. Verify that this result is the same as the APV
case.
3. Given the same firm and same project as problem 1 and 2, calculate the project’s NPV using the
Weighted Average Cost of Capital method. Compare this result to the APV and FTE results. On
each date, calculate the present value of future cash flows to both debt and equity. Verify that this
result is the same as the APV and FTE cases.
Live In-class Problems.
4. Given the partial Adjusted Present Value spreadsheet ThreeapZ.xls, do steps 5 Tax Shield and 6
Present Value of Future Tax Shield and the first part of step 7 NPV of the Project and PV of
Future Cash Flows.
5. Given the partial Flows To Equity spreadsheet ThreeftZ.xls, do steps 5 Present Value of Future
FTE and the first two parts of step 6 Initial Outlay from Shareholders, NPV of the Project,
and PV of Future Cash Flows.
6. Given the partial Weighted Average Cost of Capital spreadsheet ThreewaZ.xls, do steps 2
Equity and Debt Weights and 3 WACC.