Coffee Inc. 's investment will cost $200,000 today and produces EBIT of $500,000 at the end of for next 2 years. Depreciation of $100,000 at the end of each year(for years 1 and 2), an increase of NWC of $50,000 at the end of year 1, and a decrease of NWC of $50,000 at the end of year 2. Corporate tax rate of 40%.

If Coffee Inc. makes the investment, it would be financed using the firms debt-to-value ratio of 0.25. This ratio will be maintained forever. Required rate of return on firms equity is 12%. The firm can borrow at an interest rate (before-tax) of 5%.

a. Calculate the NPV of the investment using the WACC approach.

b. Calculate the present value of the free cash flows to equity(FCFE) using the FTE approach.