'MiamMiam Cookies, a famous Chicago-based chain of cookies and other bakery goods, is considering moving West, opening 200 shops on the West Coast. Today is January 1st, 2021. The plan is to spend about $12 million on an advertising campaign at the end of 2021, with shops opening the first day of the year 2022.

MiamMiam Cookies does not franchise its shops; while it usually leases the location, the employees are MiamMiam Cookies employees. It will spend $7 million training new employees to operate those shops during late 2021. The cost of providing each location with equipment and decorating the shop is about $140,000, for a total cost of $28 million paid at the begining of 2021. No significant working capital investment is involved (all transactions are cash, and inventories more-or-less offset payables).

The gross margin (sales revenues less rent, utilities, depreciation, labor and material costs) from a typical start-up MiamMiam Cookies shop are $40,000 and they grow at a rate of about 3% per year. Each shop will operate as a going concern (in perpetuity). Assume that the annual cost of maintaining and upgrading equipment and fixtures (annual capital expenditures) is approximately equal to annual depreciation charges.

MiamMiam Cookies has an equity beta of 1.2 and 30% debt in its capital structure (D/V ratio). The company has risk-free debt that costs 6% before taxes, and the expected rate of return on the market is 12%. The marginal tax rate is 20%. MiamMiam Cookies will finance the new project with 60% debt. Assume that the CAPM holds and that you are performing the valuation at the beginning of 2021.

4.1 What is the cost of capital of the project?

4.2 What are the relevant project free cash flows to evaluate the project?

4.3 What is the NPV of the investment project?