Your firm is considering building a $597 million plant to manufacture HDTV circuitry. You expect operating profits (EBITDA) of $141 million per year for the next 10 years. The plant will be depreciated on a straight-line basis over 10 years (assuming no salvage value for tax purposes). After 10 years, the plant will have a salvage value of $297 million (which, since it will be fully depreciated, is then taxable). The project requires $50 million in working capital at the start, which will be recovered in year 10 when the project shuts down. The corporate tax rate is 35%. All cash flows occur at the end of the year.

a. If the risk-free rate is 4.7%, the expected return of the market is 10.9%, and the asset beta for the consumer electronics industry is 1.72, what is the NPV of the project?

b. Suppose that you can finance $478 million of the cost of the plant using 10-year, 9.3% coupon bonds sold at par. This amount is incremental new debt associated specifically with this project and will not alter other aspects of the firm’s capital structure. What is the value of the project, including the tax shield of the debt?