10. Powell Motors is considering an investment which will require $75 million of capital expenditures. The project is expected to generate $12 million in cash revenues each year for the next 5 years and cash expenses are expected to equal $5 million per year for the next 5 years. The initial cost of $75 million will be depreciated straight-line to a zero salvage value over 5 years. In 5 years, the fixed assets are expected to be worthless. Powell Motors has negotiated a $20 million loan from a local bank to partially finance the project. The loan has a 7% interest rate. The local bank is requiring Powell Motors to pay $100,000 in fees. Powell Motors has a 25% tax rate. The firm is 25% debt financed, 75% equity financed, has a cost of debt of 7%, and a cost of equity of 12%. This gives the firm a WACC of: 12% (.75) + 7% (1-25) (25) = 10.31%. Powell Motors hired some non-BC graduate students to determine whether or not they should make this investment. The non-BC graduate students put together the forecast below using the APV method. In this forecast, there are 5 errors. Your task is to identify these 5 errors. It is not necessary for you to fix the errors. I just want you to identify the 5 errors in the forecast. (10 pts.) Year 2 Year 3 Year 4 Year 5 Initial Cost EBITDA - Tax (25%) EBIAT + Depreciation UCF Year 0 Year 1 (75,000,000) 7,000,000 1,750,000 5,250,000 15,000,000 (75,000,000) 20,250,000 7,000,000 1,750,000 5,250,000 15,000,000 20,250,000 7,000,000 1,750,000 5,250,000 15,000,000 20,250,000 7,000,000 1,750,000 5,250,000 15,000,000 20,250,000 7,000,000 1,750,000 5,250,000 15,000,000 20,250,000 Discount Rate 10.31% NPV (All Equity) 1,159,353.34 NPV (Financing Side Effects) Year 0 Interest Interest Tax Shield Year 1 1,400,000 1,050,000 Year 2 1,400,000 1,050,000 Year 3 1,400,000 1,050,000 Year 4 1,400,000 1,050,000 Year 5 1,400,000 1,050,000 Discount Rate 7.00% NPV (Financing Side Effects) 4,305,207.31 APV = 5,464,560.65