Reference no: EM133110713

You are the CEO of Green Paper Inc., a producer of high-end printing paper with an emphasis on environmentally friendly production methods. One of your employees has proposed a signi?cant expansion of your product line. The expansion would require an initial investment of $8m into Property, Plant, and Equipment (PPE) and into Net Working Capital (NWC). The expansion is expected to generate Earnings before Interest and Taxes (EBIT) of $1.1m in the ?rst year. The EBIT from the expansion is expected to grow at a rate of 3% per year in perpetuity. Future investments into PPE and N WC caused by the expansion are expected to equal depreciation in each year. The cash flows from the expansion have the same risk characteristics as the cash ?ows from your already existing products. The corporate tax rate of Green Paper Inc. is 35%. Ignore personal taxes and all other imperfections associated with debt ?nancing. You have estimated an equity cost of capital for Green Paper of 13.5% and a debt cost of capital of 7%. Green Paper has always maintained a constant debt-equity ratio of 0.3.

(a) Assume that the expansion project is ?nanced in the same manner as the rest of Green Paper. This means that the project will be ?nanced so that the Debt/Equity ratio of Green Paper will remain at 0.3. What is the NPV of the project under this assumption?