Lululemon is considering a new project that improves inventory management for the next

$5$

$$years$.$ The project has similar risks as the overall firm. The new technology will require an investment in computer and robotic equipment of $

$4$

$$million

$($

t

$=$

$0)$

$.$

$$The machines will be depreciated on a straight

$-$

line basis to

$0$

$$over

$5$

$$years$.$ At the end of the project, the company expects that they will be able to sell the used machines for $

$0\mathrm{.}7$

$$million$.$ To operate the machines, each year there will be a fixed cost of $

$100$

$,$

$000$

$.$

$$The benefit of these machines is that they will reduce the inventory

$($

ie Net Working Capital

$)$

$$of the company by $

$8$

$$million dollars during the time that the machines are in use

$($

starting at year

$1)$

$.$

$$There is no gain in operating revenues from these new machines. The tax rate for the company is

$20$

$\%$

$.$

$$

Based on historical company information, you estimate that the cost of equity for Lululemon is

$14$

$\%$

$$and the cost of debt is

$6$

$\%$

$.$

$$The company has maintained a debt

$-$

to

$-$

equity ratio of

$1$

:

$2$

$.$

$$

Q

$1)$

$$What are the FCFs for the project for years

$0$

$$through

$5$

$?$

$[$

If you have trouble with FCF

$,$

$$make up FCF for each year then continue with the other questions.

$]$

Q

$2)$

$$If the project is financed using the same capital structure as the firm, what is the NPV of this project?

Q

$3)$

$$If the project is all equity financed, what is the NPV of this project?