Exercise $3(10\mathrm{.}5$ points$)$

The Blue company just decided to invest in the business of collecting plastics in the sea, and recycling the materials to

build benches. The expected cash flows $($defined as the difference between annual revenues and cash operating costs,

gross of taxes$)$ are equal to:

year $1$: $300,000$ year $2$: $800,000$ year $3$: $1,500,000$ year $4$: $2,300,000$

The initial investment in capital expenditures, requested in order to start the business, is equal to $1,400\mathrm{.}000.$

The 'unlevered' annual cost of capital $k^{*}$ is equal to $16\%.$ The tax rate on corporate cash flows is equal to $28\%.$ The project

could also be financed with debt, charging an annual interest rate equal to $7\%.$

Determine:

The net present value of the project in the 'base' case $($i$.$e$.$ if the project is financed only with available cashl$)$

The 'adjusted' present value of the project, if part of the investment $(400,000)$ is financed also with debt $($paid

back after $4$ years$)$ and the remaining part by available cash

The weighted average cost of capital WACC in the case that the project is financed with debt, keeping each year

a $30\%$ ratio between the debt value and the value of the project

The net present value of the project, in the case described at question $3.($computing the expected value of the

debt outstanding each year$)$

The cost of capital $k$ required by shareholders, at the market value, in the case described at question $3.$

The adjusted present value of the project, in the case that part of the initial investment will be financed with debt

$($namely $300,000$; the annual interest rate is always $7\%$ and the debt is paid back after $4$ years$),$ another part

$($namely $200,000)$ is financed selling some real estate properties, at the market value $($in such a case we have

to pay immediately to the notary and the intermediaries the amount of $9\mathrm{.}000,$ that may be deducted from the

taxable income$),$ and the remainder with cash available.