A firm is considering a new product for their kitchen line. The kitchen product requires a machine that costs $120M. The machine will be depreciated on a straight-line basis to a zero-book value over 4 years. Sales are expected to be $300M next year, and operating expenses (excluding depreciation expense) are $265M next year. Both sales and operating expenses are expected to increase by 10% each year through year 4. The tax rate is 25%.

 a. Estimate the free cash flows for the project. 

b. The firm has two main lines: kitchen products and fitness equipment. The firm has an overall beta of 1.0. The risk-free rate is 4% and the market risk premium is 6%. The kitchen products unit has a beta of .6, while the fitness unit has a beta of 1.5. Use the capital asset pricing model to estimate the required return. 

c. Find the internal rate of return. Based on the internal rate of return, will they take the project? Explain.

Answer rating: 100% (QA)

a Free Cash Flow Estimation Year 1 Sales 300M Operating Expenses 265M Depreciation 120M 4 years 30M ... View the full answer