Question 2 CF plc is a Nottingham-based company that focuses on publishing textbooks in the area of corporate finance. Over the last five years, CF plc has spent 100,000 every year to hire practitioners and researchers to publish papers in the area of fintech. The company is considering an investment in a new textbook that reflects the recent trends in fintech. The marketing team expects that the textbook will remain in print for two years (Year 1 and 2) at which point its contents will become obsolete. Market research, which cost the firm 40,000, suggests that 4,000 and 10,000 copies are expected to be sold in year 1 and 2. The textbook will be initially priced at 50. The sale price is expected to grow at 5%/year. The launch of the new book project is expected to increase CF plc's sales in other products by 100,000 per year during year 1 and 2, those incremental sales in other products would require 50,000 operating expenses per year. In order to print the new book, the company will need to purchase a new machine that costs 200,000 this year (year 0). The depreciation is based on the straight-line method and the machine is assumed to have no market value with the obsolescence of the book. The corporate tax rate is 20%. A single copy of the new text book will cost 20 to produce, which is expected to increase at 10%/year. Finally, this project requires an initial (t=0) investment in working capital of 20,000. Thereafter, working capital is forecasted to be 10% of sales of the new textbook in year 1 and is completely recovered when the project ends in year 2. a). Given the information above, estimate the project's free cash flows. [40 marks] b). The equity cost of capital is 12% and the pre-tax cost of debt is 8%. The debt/equity ratio of ICF plc is 1/2. Assume that the new textbook project has similar financing structure and risk level of ICF plc, should the company proceed with the investment? [20 marks] c). Explain why NPV method may generate misleading results for projects with embedded options [20 marks] d). Explain the decision criteria of NPV and IRR and describe the advantages of NPV over IRR in capital budgeting. [20 marks]