A.Consider a project lasting one year only. The initial outlay is $1,000, and the expected

inflow is $1,200. The opportunity cost of capital is r = .20. The borrowing rate is rD = .10,

and the tax shield per dollar of interest is Tc = .21.

a. What is the project’s base-case NPV?

b. What is its APV if the firm borrows 30% of the project’s required investment?

B. To finance the Madison County project (see Problem 10), Wishing Well needs to arrange

an additional $80 million of long-term debt and make a $20 million equity issue. Underwriting

fees, spreads, and other costs of this financing will total $4 million. How would you take

this into account in valuing the proposed investment?