17.3 MEO Foods, Inc., has made cat food for over 20 years. The company currently has a debtequity ratio of 25 percent, borrows at a 10-percent interest rate, and is in the 40-percent tax bracket. Its shareholders require an 18-percent return.

MEO is planning to expand cat food production capacity. The equipment to be purchased would last three years and generate the following unlevered cash flows (UCF):

MEO has also arranged a $6 million debt issue to partially finance the expansion.
Under the loan, the company would pay 10 percent annually on the outstanding balance.
The firm would also make year-end principal payments of $2 million per year, completely retiring the issue at the end of the third year.
Ignoring costs of financial distress and issue costs, should MEO proceed with the expansion plan?

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2 Unlevered Cash Flows by Year (in $ millions) 0 1 3 4+ -15 5 8 10 0