Part A

Company J is considering a project with a $4-$year lifespan. The initial cash flow estimate is $$125$ million in the first year increasing by $$125$ million in each of the years $2$ through $4.$ To begin the project, the company will need to invest $$1,000,000,000.$ Company J would like to cover the initial investment amount with existing internal resource and thereby not borrow. As such it remains an all$-$equity firm. The unlevered cost of its equity is $10\%,$ similar to other firms in the industry sector. There will be no terminal value of significance at the end of year $4.$

Using the domestic APV equation from Chapter $18$ and noted below, construct a spreadsheet model to determine whether it makes sense for Company J to proceed with this project. Please review the example for an APV model that was introduced in the lecture when developing your answer.

Complete the following tables. Round your answers to the nearest dollar and do not enter the $ symbol in your answers.

APV$={\displaystyle \underset{t=1}{\overset{T}{}}}(\frac{(OC{F}_t)(1-)}{(1+K_u{)}^t}+\frac{D_t}{(1+i{)}^t}+\frac{I_t}{(1+i{)}^t})+\frac{T{V}_T}{(1+K_u{)}^T}-C_0$

Parameters

Initial Outlay

Unlevered Equity Cost $\%$

Years Project Life

Terminal Value

$0$

$

Initial Outlay

Cash Flows

Discounted Cash Flows

Symbol

$C_0$

$K_U$

T

$T{V}_T$

Value

type your answer... $\%$

years

$2$

$3$

$4$

$1$

$

$ $ type your answer... $ type your answer...

APV$=$

Based on the APV, would you recommend this project?