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Suppose you have a project with a projected annual cash flowbefore interest and taxes of $6 million, indefinitely. The initialinvestment of $18 million will be financed with 60% equity and 40%debt. Your tax rate is 34%, your cost of capital if you were anall-equity firm is 24%, and your usual borrowing rate is 10%. Yourproject has been reviewed by your local city government and hasbeen selected to receive municipal funding at a rate of 8%. Therewill, however, be a flotation cost to this debt of $500,000, whichmust be expensed immediately and will be paid from the grossproceeds of your debt. Using APV, determine whether to approve thisproject or not.
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