First identify relevant project cash flows. Then consider a five-year investment of 1,000, financed with 60% equity and 40% debt. Corporate tax is 25%, equity cost 9% and debt cost 3%. The 400 debt principal is fixed and repaid at the end of year 5.
Past R&D is sunk and excluded. Include overhead only to the extent the project changes actual spending or consumes an alternative-use resource. Incremental inventory investment is a working-capital outflow; recover it only when released.
The 6.3% WACC is the initial-ratio textbook calculation. A fixed bullet debt balance generally does not maintain constant market-value leverage as project value changes, so a single constant WACC need not be exact. APV is the consistent method for the stated fixed debt schedule.
13.74
Add this shield value to unlevered NPV. Debt principal itself is not an operating cash flow.
Wilson borrows €3,000 for a three-year project. The loan has three equal end-of-year instalments, a risk-free annual rate of 4% and corporate tax rate 30%. Assume full immediate deductibility.
| Year | Opening debt | Payment | Interest | Principal | Tax shield | PV shield |
|---|---|---|---|---|---|---|
| 1 | 3,000.00 | 1,081.05 | 120.00 | 961.05 | 36.00 | 34.62 |
| 2 | 2,038.95 | 1,081.05 | 81.56 | 999.49 | 24.47 | 22.62 |
| 3 | 1,039.47 | 1,081.05 | 41.58 | 1,039.47 | 12.47 | 11.09 |
€68.33.