7. Consider the project described in Problem 6. Assume that the firm plans to finance 40% of its net capital expenditure and working capital needs with debt.

a. Estimate the free cash flow to equity for each of the four years.

b. Estimate the payback period for equity investors in the firm.

c. Estimate the NPV to equity investors if the cost of equity is 16%. Would you accept the project?

d. Estimate the IRR to equity investors in the firm. Would you accept the project?

This is 6 !! 6. You are provided with the projected income statements for a project: Year 1 2 3 4 Revenues ($) $10,000 $11,000 $12,000 $13,000 Cost of goods sold ($) $4,000 $4,400 $4,800 $5,200 Depreciation $4,000 $3,000 $2,000 $1,000 = EBIT $2,000 $3,600 $5,200 $6,800 The tax rate is 40%. The project required an initial investment of $15,000 and an additional investment of $2,000 at the end of year two. The working capital is anticipated to be 10% of revenues, and the working capital investment has to be made at the beginning of each period.