2. Technion is considering a project to buy a machine for their production in Kl

Question

2. Technion is considering a project to buy a machine for their production in Klang. It requires a RM6 million investment and offers a cash flow (after-tax) of 6 years RM2.5 million per year. It is expected that the project is financed by 50% debt and 50% equity, respectively. The unlevered cost of equity is 15%, which reflects the project's business risk. The debt outstanding for the 6 years is as follow: Year Debt outstanding at the start of year (RM'm 3.0 2.5 2.0 1.5 1.0 0.5 (a) Given the interest rate is 9% and the tax rate of 30%, the debt will be paid off in equal annual instalment over the project's 6-year life. Calculate APV. (b) Calculate the APV if the firm incurs issue costs of RM100,000 to raise the required equity and they also receive the subsidy from the government of RM250,000

Explanation / Answer

(a) APV :

PV of Base Case Value

(b) APV if Issue Cost incurred for Equity & Subsidy Received from Govt.

Year Opening Principal Total Repayment Interest Principal Paid Closing Principal 1 3000000 770000 270000 500000 2500000 2 2500000 725000 225000 500000 2000000 3 2000000 680000 180000 500000 1500000 4 1500000 635000 135000 500000 1000000 5 1000000 590000 90000 500000 500000 6 500000 545000 45000 500000 0 Total 3945000 945000 3000000

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