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You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $6 million. The product will generate free cash flow of $0.75 million the first? year, and this free cash flow is expected to grow at a rate of 3% per year. Markum has an equity cost of capital of 11.2%?, a debt cost of capital of 7.87%?, and a tax rate of 32%. Markum maintains a? debt-equity ratio of 0.50.
a. What is the NPV of the new product line? (including any tax shields from? leverage)?
b. How much debt will Markum initially take on as a result of launching this product? line?
c. How much of the product? line's value is attributable to the present value of interest tax? shields?
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