Note: Please show your work and write out your answer in paragraph format. Thank you!

13. A finance professional, Chris Mass, has been tasked (by his boss, Hannah Ka) to recommend whether a proposed project (code named Holiday) should be accepted or not. Holiday would require a new investment of $60 million in a new plant for producing a new line of mittens. Because the plant is difficult to build, Holiday will invest $30 million immediately and the other $30 million at the end of year 1. The plant has an expected life of four years and is expected to generate incremental revenues of $20 million per year (starting in year 2). Chris expects incremental fixed costs to rise to $8 million a year and variable costs to rise to $3 million per year when the plant is operating. Assume the new plant will be depreciated straight-line over the four years after construction is finished and will have no salvage value at the end of these four years. Chris has calculated the opportunity cost of capital to be 12% and applies an effective tax rate of 15%. Assume all operating CFs are at the end of each year.

a. Assuming depreciation cannot be taken until after the full $60 million is invested, what is Holidays depreciation tax shield for years 2 through 5?

b. What is the present value of the Holidays depreciation tax shield?

c. What is Holidays NPV?

d. Suppose Chris believes this investment will be too difficult for his division to handle. Describe three specific things Chris might change in building his NPV model to tilt the decision away from making this new investment.