Page 146 - AFM Integrated Workbook STUDENT S18-J19

Chapter 7

Note: Instead of the assumed k d of 5%, the risk-free rate of 3% could
alternatively have been be used for discounting.

Financing side effects – present value of tax relief on interest

On subsidised loan = $3,092,784 x (2/3) x 2.6% x 20% x 4.329 = $46,414

On normal loan = $3,092,784 x (1/3) x 5% x 20% x 4.329 = $44,629

Adjusted present value (APV)

$

Base case NPV (93,000)
Financing side effects

Equity issue costs (40,000)
Debt issue costs (92,784)
PV of subsidy benefit 171,375

PV of tax relief on subsidised loan 46,414
interest
PV of tax relief on normal loan interest 44,629

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APV 36,634

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A positive APV means that the project, funded in this way, is financially viable.

Illustrations and further practice

Now try TYU 2 and TYU 3 in Chapter 7

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