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22 January, 13:57

A firm is evaluating a project with an initial investment at time 0 of $640,000. The present value of the levered cash flows is $729,400 and the net present value of the project is $157,000. Using the flow-to-equity method of valuation determine the amount borrowed. A. $89,400B. $67,600C. $54,300D. $64,000

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  1. 22 January, 15:44
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    Using the flow-equity method of valuation the borrowed is $67600, option B.

    Explanation:

    In order to determine the amount borrowed in executing the project, we make use of the below formula which shows that we are working backwards.

    Amount borrowed=present value of cash inflows-levered cash flows

    present value of cash inflows=net present value+initial investment

    present value of cash inflows=$157000+$640000

    present value of cash inflows=$797000

    levered cash flows=$729400

    Amount borrowed=$797000-$729400

    amount borrowed = $67600
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