Project life 4 years

Initial cost of equipment ($millions) 16

Depreciation of equipment per year ($ millions) 4

Expected sale price of equipment at end of project ($ millions) 5

Earnings before Interest and Tax (EBIT) 20

Tax rate 30%

Government treasury bond yield 4%

Bank loan interest rate 6%

Market portfolio expected return 10%

Beta of levered equity 1.3

Firm's debt-to-equity ratio 50%

No changes in working capital are expected.

The debt-to-equity ratio will be kept constant throughout the life of the project.

Assume all cash flows are at the end of the relevant year. a) Calculate the unlevered cash flow for years 0, 1, 2, 3 and 4 of the project.

b) Calculate the Weighted Average Cost of Capital (after tax)

c) Calculate the projects NPV