All figures are in $ million
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Base case net present value is approximately $8·62 million.
W1 All figures are in $ million
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W2 All figures are in $ million
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W3 Lintu Co asset beta = 1·5 x $128m/($128m + $31·96m x 0·8) approx. = 1·25
All-equity financed discount rate = 2% + 1·25 x 8% = 12%
Financing side effects
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Financing the project entirely by debt would add just under $1·78 million to the value of the project, or approximately, an additional 20% to the all-equity financed project.
The adjusted present value (APV) of the project is just under $10·4 million and therefore it should be accepted.
Note: In calculating the present values of the tax shield and subsidy benefits, the annuity factor used is based on 4% to reflect the normal borrowing/default risk of the company.
Alternatively, 2% or 2·5% could be used depending on the assumptions made. Credit will be given where these are used to estimate the annuity factor, where the assumption is explained.
