Reference no: EM132828570

Please make an excel for detail

Your firm is considering building a $500 million plant to manufacture HDTV circuitry. You expect operating profits (EBITDA) of $150 million per year for the next 10 years. The plant will be depreciated on a straight-line basis over 10 years starting from year 1. In other words at t=0, they will incur a capital expenditure of $500 million, and they will be able to expense $50 million per year as depreciation in years t=1,...,10. The project requires $40 million in working capital at the start (year 0), which will be recovered in year 10 when the project shuts down. All cash flows occur at the end of the year.

The corporate tax rate is 35%, the risk-free rate is 5%, the market risk premium is 6%, and the asset beta for the consumer electronics industry is 1.67.

a. What is the project's unlevered cost of capital? (one digit after the decimal point)

b. What is the project's NPV if it is financed only with equity? (one digit after the decimal point)

c. Suppose that you can finance $400 million of the cost of the plant using 10-year, 10% coupon bonds sold at par. This amount is incremental new debt associated specifically with this project and will not alter other aspects of the firm's capital structure.

What is the project's NPV, once we include the interest tax shields of debt? (Assume that the interest expense in years 1-10 is $400 ×10% = $40 million and that rD=10%.) (one digit after the decimal point.)