The Canik Corporation is a small manufacturer of photography products. Until recently, the company was all equity-financed (shareholders’ equity totaled \($13\) million), having a cost of equity of ten percent. The company decided to expand its productive capacity by investing in new plant and equipment at a cost of \($15\) million. Executives at Canik decided to finance the capital investment with lower-costing debt financing that carried an interest rate of only eight percent. The CEO of The Canik Corporation wondered what the company was now worth following the plant expansion; consequently, the CEO instructed the company’s CFO to prepare a forecast of the firm’s free cash flows. The CFO’s forecast was as follows:

Required

1. Calculate the value of the Canik Corporation.
2. Is the company’s decision to invest in new plant and equipment a good operating decision? Why?

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(in thousands) Free cash flow Terminal value. Year 1 $4,000 Year 2 $5,150 Year 3 $6,100 Year 4 $ 6,350 17,500