A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0). What is the project’s APV in the following cases?
a. If the firm invests, it has to raise $500,000 by a stock issue. Issue costs are 15% of net proceeds.
b. If the firm invests, its debt capacity increases by $500,000. The present value of interest tax shields on this debt is $76,000.
Formula (in words) Calculation
a. APV stock issue
b. APV debt increases