You are an American firm considering opening a factory in France. You believe that your initial costs will be $5 million, and your expected after-tax cash flows will be $350,000/year for 30 years. You estimate an all-equity Beta of .8, that the risk-free rate is 1%, and that the market risk-premium is 7%. You are subject to a 30% tax rate. To the nearest $10, what is your APV

An American Firm in France

The APV is:

= $1,251,150

Explanation:

a) Data and Calculations:

Initial cost of investment = $5 million

Expected annual after-tax cash flows = $350,000

Duration of cash flows and investment = 30 years

All-equity Beta = .8 or 80% (.8 * 100)

Risk-free rate = 1%

Market risk-premium = 7%

Market rate = 8% (1% + 8%)

Expected return (after-tax)= .8 * 8% = 6.4%

The present value of the cash flows = $6,251,150

The APV (Adjusted Present Value) = $1,251,150 ($6,251,150 - $5,000,000)

From an online financial calculator:

N (# of periods)  30

I/Y (Interest per year)  6.4

PMT (Periodic after-tax Cash flows)  $350,000  

Results

PV = $6,251,146.79

Sum of all periodic receipts (after-tax) = $10,500,000.00

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