There is an investment project that requires an upfront capital investment of 12, which is depreciated...

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There is an investment project that requires an upfront capital investment of 12, which is depreciated in a straight-line over 6 years. Furthermore, in year 1 net working capital increases by 4 and in year 8 this extra net working capital is returned. The project generates the following EBIT: Time 1 2 3 4 5 6 7 8 EBIT 2 2 4 4 6 6 8 8 The 3 of the (unlevered) project is 1.5, the risk-free interest rate is 5%, and the market risk premium is 7%. The corporate tax rate is 35%. a. What is the free cash flow that the company generates in each year? The firm wants to keep a constant debt to equity ratio (debt/equity) of 0.5 and given this debt to equity ratio debt is risk-free. b. What is the race? c. What is NPV of the levered project? Assume now that instead of keeping a constant leverage ratio the firm wants to issue risk-free debt worth 20 that matures in 7 years and makes coupon payments in each of the next 7 years. After 7 years the firm will remain unlevered d. What is NPV of the unlevered project? e. What is NPV of the levered project? There is an investment project that requires an upfront capital investment of 12, which is depreciated in a straight-line over 6 years. Furthermore, in year 1 net working capital increases by 4 and in year 8 this extra net working capital is returned. The project generates the following EBIT: Time 1 2 3 4 5 6 7 8 EBIT 2 2 4 4 6 6 8 8 The 3 of the (unlevered) project is 1.5, the risk-free interest rate is 5%, and the market risk premium is 7%. The corporate tax rate is 35%. a. What is the free cash flow that the company generates in each year? The firm wants to keep a constant debt to equity ratio (debt/equity) of 0.5 and given this debt to equity ratio debt is risk-free. b. What is the race? c. What is NPV of the levered project? Assume now that instead of keeping a constant leverage ratio the firm wants to issue risk-free debt worth 20 that matures in 7 years and makes coupon payments in each of the next 7 years. After 7 years the firm will remain unlevered d. What is NPV of the unlevered project? e. What is NPV of the levered project?

Answer rating: 100% (QA)

Solution a Free Cash Flow FCF The FCF can be calculated as the EBIT minus the capital expenditures C... View the full answer