• Microsoft is evaluating a potential investment in a new datacenter facility located in Europe. The initial capital investment in this facility is $10 million with an expected useful life of 5 years.
• The datacenter is to be depreciated to the book value of $0 over the 5 years and it is expected to be sold for $2 million at the end of project.
• Microsoft has already is commissioned a consultant firm in order to perform a technical due diligence of the facility. The service fee paid amount is $500000.
• The gross revenue the Microsoft is planning to generate with the new facility will be $2.8 million per year for the 5 year (starting of the end of year1).
• The annual variable cost for the datacenter will be 25% of gross revenue for every year.
• The project requires $500000 of working capital immediately but it will not require any other working capital investment during its life. The working capital will be recovered in the last year of the project.
• The corporate rate tax is 30% and Microsoft has a weighted average cost of capital of 15%.
• Microsoft is planning to finance this project using the higher proportion of debt than the one used to finance the company as whole.

1. Calculate free cash flow for every year and net present value (NPV). Show calculation Should Microsoft under take this project based on your analysis? Explain why or why not?
2. The Microsoft Company will be financing the project using higher proportion of debt than the one used to finance the company as a whole. What risk is Microsoft incurring by using the companys WACC as a discount rate? What would happen to WACC and NPV of the project in the case Microsoft would be using the appropriate discount rate?
3. Under what condition WACC can be used as a discount rate for the cash flow of a specific project?