Q$16.$ There is an investment project that requires an upfront capital investment of $10,$ which

is depreciated in a straight$-$line over $4$ years. Furthermore, in year $2$ net working capital

increases by $5$ and in year $7$ this extra net working capital is returned. The project

generates the following EBIT:

The $$ of the $($unlevered$)$ project is $1\mathrm{.}3,$ the risk$-$free interest rate is $5\%,$ and the market

risk premium is $5\%.$ The corporate tax rate is $40\%.$

a$.$ What is the free cash flow that the company generates in each year?

The firm wants to keep a constant leverage ratio $($debt$/($equity$+$debt$))$ of $0\mathrm{.}5$ and given

this leverage ratio debt is risk$-$free.

b$.$ What is the $r_{\text{w}\text{a}\text{c}\text{c}}?$

c$.$ What is NPV of the levered project?

Assume now that instead of keeping a constant leverage ratio the firm wants to issue

risk$-$free debt worth $18$ that matures in $5$ years and makes coupon payments in each of

the next $5$ years. After $5$ years the firm will remain unlevered

d$.$ What is NPV of the unlevered project?

e$.$ What is NPV of the levered project?