BilABong Enterprises is considering taking on a new project. The project itself requires a net investment of $5 million and is expected to generate pretax earnings of $1 million per year growing at 2% in perpetuity. The object of the proposed project is to make snowboards. Swoosh, the dominant player in the industry, is a single product company, making snowboards exclusively. Swoosh is allequity financed. It has a beta of 0.75. The riskfree rate is 10% and the market risk premium is 10%. Assume that BilABong can borrow at the riskfree rate, and that both firms face a corporate tax rate of 34%.

(a) What is the NPV of the project if it is all equity financed?

(b) What is the NPV of the project if BilABong issues $4 million annual coupon debt due in 5 years to make the investment?

One of the interesting features about this venture is the planned marketing strategy for this product. These snowboards will be family oriented and will be advertised and marketed as such. The idea came out of the division of BilABong that owns Boring Downhill Ski Mountain in Whistler, BC. Boring would like the idea to work so are willing to subsidize the enterprise by offering the snowboard division a $1 million interestfree loan for 5 years to finance the investment.

Calculate the NPV of the project if the remaining investment is:

(c) equity financed.

(d) debt financed.