1) You are the CFO of a large company, and you must evaluate the following investment opportunity. The projects initial capex is $100 million (no additional capex needed). Assume a straight-line, 10 year depreciation schedule. Assume that the project will produce revenues of $30m, $80m, $110m over the next 3 years. Operating expenses (excluding depreciation) will be 50% of revenues. Net operating working capital will be 10% of revenue. Interest expense is 10% of revenue. The firms average tax rate is 20%, and the marginal tax rate is 30%. You expect to sell your PP&E at the end of year 3 for $40 million. Assume all of the operating cash flows occur in the middle of the year. Assume that you recoup your net operating working capital 6 months after the sale of your PP&E, and the WACC is 15%. What is the NPV of this opportunity?

A) -$6.933 million B) -$3.017 million C) -$0.685 million

2) You estimate that the free cash flows of a firm will be $10million, $15million, $20million and $22million over the next four years. You estimate that the cash flows will grow at 5% thereafter. You have calculated the cost of equity capital = 15.5% and the pre-tax cost of debt capital = 7%. The average tax rate is 20%, and the marginal tax rate is 40%. The firm is currently operating with a D/E ratio of 1.0, and the target D/E ratio is 0.60. Calculate the value of the firm.

A) $290.68 million B) $386.92 million C) $264.86 million