After the recent food polsoning outbreak, Bullrito is considering a new marketing project to Improve Its brand image. At time 0, this project requires an operating expense of $40M to make a TV commercial. Bullrito plans to air this commercial over the next to years. Thanks to this new commercial, you expect that the firm's EBIT will increase by $50.40M In year 1 and by $52.92M by year 2. You wan to find the NPV of this project using two different methods.

• Bullrito's D/E ratio is 2 and the firm plans to keep this ratio fixed
• Bullrito's cost of debt is 3%. Under the current capital structure, the firm's cost of equity is 15%
• Bullrito's corporate tax rate is 30%

PART O: Free Cash Flows

a. The project does not incur any incremental depreciation, CAPEX, nor net working capital requirements. The EBIT is summarized as the following. Find the free cash flow for each ear.

Year 1. Year 2. Year 3.

EBIT. -$40M. $50.4M. $52.92M

Free Cash Flow. ??? ??? ???

PART 1: WACC Method

For part 1, we assume that the new project is a "carbon copy" of the firm's existing business.

1. What is Bullrito's WACC?
2. What is the NPV of the project based on the WACC method?

PART 2: APV Method

d. What is bullrito's unlevered cost of capital?

c. What is the discount rate for future interest tax shields (i.e. r its) explain your answer

f. Find the interest expense and interest tax shield each year if the amount of debt for the project is given as the following:

year 0. year 1. year 2

Debt Amount. $43.92M. $23.21M. $0M

Interest Expense. ??? ??? ???

Interest Tax Shield. ??? ??? ???

1. What is the present value of the interest tax shield (Vits)?
2. What is the NPV of the project if it were financed by 100% equity (i.e. unlevered: NPVu)
3. Finally, what is the NPV of the project based on the APV method?

I dont have anything to add, I didnt create the question... I was given the question and couldnt figure it out, I wonder why it fails though, thats interesting.