3 October 2003 QUESTION 2 Step 1- Calculate the NPV Assuming All Equity Financed NPV=$2 500000(1-0.30)PVIF A, 162+$4 000 000(1-0. 30)PVIFA, 62 PVIF162 +$20000030)PvF6s+ $9000000 0.30×PV065 +$1000000(1-0.30)PVF155-$900000 =($250000.70×1605)+($4000000×1605×0743) +(2000000030476)+(180000×0.30×3274) +(10000070×0476)-$900000 $2808750+S3339042+$666400+$1767960+$333200-$9000000 -$84648 Step 2- Calculate Pv of financing Side effects PV oftax shield PVA=PMTXPVIFAkn 300000PMT× PVIFAOr05 、$3000000 3.791 =$791348 Year Opening Repayment Interest Principal Ending Principal ComponentComponent Principal 3000000791348 300000 491348 2508652 2508652 250865 40483 1968169 3 1968169 791348 196817 5945311373638 4 1373638791348 137364 653984 719654 719654 791348 71965 719383 2713 October 2003 QUESTION 2 Step 1 – Calculate the NPV Assuming All Equity Financed ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) - $84 648 $2 808 750 $3339 042 $666 400 $1767 960 $333 200 - $9 000 000 $1000 000 0.70 0.476 - $9 000 000 $2 000 000 0.70 0.476 $1800 000 0.30 3.274 $2 500 000 0.70 1.605 $4 000 000 0.70 1.605 0.743 $1000 000 1- 0.30 PVIF - $9 000 000 0.30 PVIFA 5 $9 000 000 $2 000 000 1- 0.30 PVIF NPV $2 500 000 1- 0.30 PVIFA $4 000 000 1- 0.30 PVIFA PVIF 0.16,5 0.16,5 0.16,5 0.16,2 0.16,2 0.16,2 = = + + + + +   +   +   =   +    + + +   = + Step 2 – Calculate PV of Financing Side Effects a. PV of tax shield $791348 3.791 $3 000 000 PMT $3 000 000 PMT PVIFA PVA PMT PVIFA 0.10,5 k,n = = =  =  Year Opening Principal Repayment Interest Component Principal Component Ending Principal 1 3 000 000 791 348 300 000 491 348 2 508 652 2 2 508 652 791 348 250 865 540 483 1 968 169 3 1 968 169 791 348 196 817 594 531 1 373 638 4 1 373 638 791 348 137 364 653 984 719 654 5 719 654 791 348 71 965 719 383 271