Three Valuation Methods

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1. A firm has the opportunity to do a one-shot project. It requires a date 0 initial outlay for new investment of $250,000. During the initial five-years, it will generate the following before-tax cash flows: date 1 = $380,000, date 2 = $430,000, date 3 = $520,000, date 4 = $460,000, date 5 = $280,000, and $120,000 each year thereafter. The project’s tax rate is 36.0%, its unlevered cost of capital is 11.6%, and the riskfree rate (= cost of debt) is 3.7%. The company has precommitted to a particular quantity of debt on the following dates to support this project: date 0 = $130,000, date 1 = $220,000, date 2 = $270,000, date 3 = $240,000, date 4 = $150,000, and $70,000 each year thereafter. What is the project’s NPV 

as calculated using the APV method? What is the present value of future cash flows to both debt and equity?

2. Given the same firm and same project as problem 1, calculate the project’s NPV using the Flows To Equity method. Compare this result to the APV result. On each date, calculate the present value of future cash flows to both debt and equity. Verify that this result is the same as the APV case.