Question: Creative Flow, Inc. is considering a new project costing $600 million and has already spent $20 million on feasibility study. The cost of the

Creative Flow, Inc. is considering a new project costing $600 million and

Creative Flow, Inc. is considering a new project costing $600 million and has already spent $20 million on feasibility study. The cost of the project can be depreciated straight line to zero over 30 years. Part of the cost of the project will be financed with a new bond issue. Creative Flow, Inc. will issue a bond having a face value equal to $300 million, which carries 30 annual coupon payments equal to 4% of face value. The bond's price is $300 million. In addition to the coupons, the debt obligation calls for payment of the face value of $300 million 30 years from now. The project generates EBIT with an expected value of $50 million for each of the next 30 years, commencing next year. The firm's intern has estimated that the beta of unlevered assets will be 0.75. The expected return on the market is 12% and the risk-free rate is 4%. The corporate marginal tax rate is 20% and the average tax rate is 10%. CFO asks you to evaluate the project using APV. a) What are the expected annual after-tax unlevered cash flows associated with the project? b) What is the present value of the after-tax unlevered cash flow stream? c) What is the value of the debt tax shield associated with this project? d) What is the project's APV? Should Creative Flow, Inc. invest into the project?

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