Please answer question b or c

You are the CEO of Green Paper Inc., a producer of high-end printing paper with an emphasis on environmentally friendly production methods. One of your employees has proposed a significant expansion of your product line. The expansion would require an initial investment of $8m into Property, plant, and Equipment (PPE) and into Net Working Capital (NWC). The expansion is expected to generate Earnings before Interest and Taxes (EBIT) of $1.1m in the first year. The EBIT from the expansion is expected to grow at a rate of 3% per year in perpetuity. Future investments into PPE and NWC caused by the expansion are expected to equal depreciation in each year. The cash flows from the expansion have the same risk characteristics as the cash flows from your already existing products. The corporate tax rate of Green Paper Inc. is 35%. Ignore personal taxes and all other imperfections associated with debt financing. You have estimated an equity cost of capital for Green Paper of 13.5% and a debt cost of capital of 7%. Green Paper has always maintained a constant debt-equity ratio of 0.3. a) [10 marks) Assume that the expansion project is financed in the same manner as the rest of Green Paper. This means that the project will be financed so that the Debt/Equity ratio of Green Paper will remain at 0.3. What is the NPV of the project under this assumption? b) [5 marks] How much additional debt (in terms of market value) will Green Paper need to borrow initially because of the expansion project, if it is financed in the same manner as the rest of Green Paper? c) [5 marks) Assume instead that the expansion project is financed solely by issuing new equity to investors. This means that the Debt-Equity ratio of Green Paper will decrease. What is the NPV of the project under this assumption? If this differs from your answer in Part A, explain why. Q a) Earning before interest and taxes(EBIT) = $1.1 million Constant growth rate(g) = 3% per annum WACC = Cost of equity (Ce)*Weight of equity (We) + Cost of debt(Cd)*(1-Tax rate) Weight of debt( Wd) WACC = 13.5%*0.70+ 7%(1-35%)*0.30 WACC = 10.815% Present value of future cash inflows = EBIT(1-T)/( WACC-9) Present value of cash inflow = $1.1(1-35%)/(10.815%-3%) = $9.1491 million Initial Outflow = $ 8 million NPV = Inflow - Outflow = ($9.1491-$8)million = $1.1491 million