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

adjusted present value $207974.64

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 * $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
`=(cash\ flow)/(cost\ of\ equity) - initial\ cost`

`= (120838.4)/(0.142) - 685000`

= $165974.64

step 3 Present value of tax

present value
`=  Debt * tax\ rate`

`= 200000* 0.21 = $42000`

step 4 adjusted present value

APV = Net present value + present value of tax

= 165974.64 + 42000 = $207974.64