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Triad Corporation has established a joint venture with Tobacco Road Construction, Incorporated, to build a toll road in North Carolina. The initial investment in paving equipment is $153 million. The equipment will be fully depreciated using the straight-line method over its economic life of five years. Earnings before interest, taxes, and depreciation collected from the toll road are projected to be $21.2 million per annum for 20 years starting from the end of the first year. The corporate tax rate is 22 percent. The required rate of return for the project under all-equity financing is 13 percent. The pretax cost of debt for the joint partnership is 8.5 percent. To encourage investment in the country’s infrastructure, the U.S. government will subsidize the project with a $75 million, 15-year loan at an interest rate of 5 percent per year. All principal will be repaid in one balloon payment at the end of Year 15. What is the adjusted present value of this project? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89

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Uploaded ImageTriad Corporation has established a joint venture with Tobacco Road Construction, Incorporated, to build a toll road in North Carolina. The initial investment in paving equipment is $153 million. The equipment will be fully depreciated using the straight-line method over its economic life of five years. Earnings before interest, taxes, and depreciation collected from the toll road are projected to be $21.2 million per annum for 20 years starting from the end of the first year. The corporate tax rate is 22 percent. The required rate of return for the project under all-equity financing is 13 percent. The pretax cost of debt for the joint partnership is 8.5 percent. To encourage investment in the country’s infrastructure, the U.S. government will subsidize the project with a $75 million, 15-year loan at an interest rate of 5 percent per year. All principal will be repaid in one balloon payment at the end of Year 15. What is the adjusted present value of this project? Note: Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89

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Asked by: rohan singh
Created at: 2025-11-05 11:00:46

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To calculate the adjusted present value (APV) of this project, we need to consider both the base case NPV (all-equity financing) and the present value of the financing effects. Here's a structured approach: ### Step 1: Calculate the Base Case NPV (All-Equity Financing) 1. **Initial Investment**: $153 million 2. **Annual Earnings Before Interest, Taxes, and Depreciation (EBITD)**: $21.2 million 3. **Depreciation**: $153 million / 5 years = $30.6 million per year 4. **Earnings Before Tax (EBT)**: $21.2 million - $30.6 million = -$9.4 million 5. **Tax Savings**: $30.6 million * 22% = $6.732 million 6. **Cash Flow**: $21.2 million + $6.732 million = $27.932 million per year 7. **Discount Rate**: 13% 8. **NPV of Cash Flows**: Calculate the present value of $27.932 million per year for 20 years at 13%. ### Step 2: Calculate the Present Value of Financing Effects 1. **Government Loan**: $75 million at 5% interest for 15 years 2. **Interest Payments**: $75 million * 5% = $3.75 million per year 3. **Tax Shield**: $3.75 million * 22% = $.825 million per year 4. **Present Value of Tax Shield**: Calculate the present value of $.825 million per year for 15 years at 8.5% (cost of debt). 5. **Balloon Payment**: $75 million at the end of Year 15 6. **Present Value of Balloon Payment**: Calculate the present value at 8.5%. ### Step 3: Adjusted Present Value (APV) 1. **APV** = Base Case NPV + Present Value of Financing Effects ### Calculation Perform these calculations using the appropriate present value formulas or financial calculator to get the final APV. Make sure to use the exact interest rates, time periods, and not round intermediate calculations as instructed.

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