Triad Corporation has established a joint venture with Tobacco Road Construction, Inc., to build a toll road in North Carolina. The initial investment in paving equipment is $80 million. The equipment will be fully depreciated using the straight-line method over its economic life of five years. The cash revenue less cash expense collected from the toll road are projected to be $12.1 million per annum for 20 years starting from the end of first year. The corporate tax rate is 35 percent. The required rate of return for the project under all-equity financing is 13 percent. The pretax cost of debt for the joint partnership is 8.5 percent. To encourage investment in the country’s infrastructure, U.S. government will subsidize the project with $25 million, 15-year loan at an interest rate of 5 percent per year. All principal will be repaid in one balloon payment at the end of Year 15.
a. What is the present value of the project without debt financing from government subsidy? (5 points)
b. What is the adjusted present value of the project with the debt financing from government subsidy? (5 points)
