MVP, Inc. has produced rodeo supplies for over 20 years. The company currently h
ID: 2648919 • Letter: M
Question
MVP, Inc. has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 40 percent and is in the 35 percent tax bracket. The required return on the firm?s levered equity is 15 percent. MVP is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: Year Cash Flow The company has arranged a $9.69 million debt issue to partially finance the expansion. Under the loan, the company would pay interest of 8 percent at the end of each year on the outstanding balance at the beginning of the year. The company would also make year-end principal payments of $3.230,000 per year, completely retiring the issue by the end of the third year. Calculate the APV of the project. (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))Explanation / Answer
total debt in the expansion process: $9,690,000 and the interest is 8%
the payment of capital ($9.69 million) has repaid in 3 equal instalments in 3 years)
payment in year $3,666,050
payment in year 2= $3,230,000+ (6,460,000(8-0.35))
= $3,230,000+$290,700=$3,520,700
payment in year 3= $3,230,000+(3,230,000(8-0.35)=$3,375,350
the total payment= $3,666,050+3,520,700+3,375,350= $10,562,100
the cash inflows are= 5,830,000+9,630,000+8,930,000= $24,390,000
total equity= $8,760,000 and debt payment= $10,562,100
total benefit= 24,390,000-(10,562,100+8,760,000)= $5,067,900
APV= $5,067,900/3= $1,689,300
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