Your firm is considering a $120 million investment to launch a new product line. The project is expected to generate a free cash flow of $20 million per year, and its unlevered cost of capital is 8%. To fund the investment, your firm will take on $72 million in permanent debt.

a. Suppose the marginal corporate tax rate is 35%. Ignoring issuance costs, what is the NPV of the investment?

b. Suppose your firm will pay a 4% underwriting fee when issuing the debt. It will raise the remaining $48 million by issuing equity. In addition to the 7% underwriting fee for the equity issue, you believe that your firm’s current share price of $39 is $4 per share less than its true value. What is the NPV of the investment including any tax benefits of leverage?