Hi,

Could you please help me with the following; I realize it's a long one, but I'm completely lost and need to grasp it. Thanks very much in advance :)

Today is January 1, 2021. You are helping Giuseppe make projections for a 5-year project in the telecom industry that lasts till December 31, 2025. The manufacturing equipment needed for the project costs 1 million, and according to the tax authority, is depreciated using the straight-line method over five years. The pre-tax salvage value of the equipment at the end of the five years is 300,000. The purchase of the equipment is made now on January 1, 2021. The expected revenues each year from production are expected to be 950,000 at the end of this year, then 970,000 at the end of next year, then 990,000 at the end of the following year, and so on (20,000 increments until the end). The expected sales growth is an extrapolation from past data on average industry sector sales. The labor required to operate the equipment will cost 100,000 every year, starting at the end of this year. Wages are not expected to change over time due to strict employment regulations. The typical firm in this industry faces a marginal tax rate of 25%. Working capital each year is maintained at 20% of next year sales (and is fully recovered at the end; i.e. the level of working capital is 0 at the end of the project). Thus today, the level of working capital will be 20% of sales at the end of this year (assume there was no working capital prior to today). The cost of financing for the project can be inferred from the following data. Analysts estimate that the typical cost of short-term debt for telecom projects is approximately 5%. The projected beta of equity for the project is 1.1, and the firm is planning to maintain a constant debt-to-equity ratio (in market values) of 0.70. Using expert forecasts for stock market returns, you find that the annual expected return for the entire market is 9% for the next 5 years, and that the risk-free rate will be projected to remain at 4% over the entire life of the project. a) Forecast the cash flows from the project for each year. b) Calculate the WACC