Question 4 - WACC (35 points) 1 You have the following data for a project: The project lasts for 5 years. The equipment needed for the project costs 1.5 million and is depreciated using the straight line method over five years. The investment is made right at the beginning (start of the first year). EBITDA is 400,000 in year 1, 440,000 in year 2, 480,000 in year 3, and so on (40,000 increments until year 5). EBITDA is earned at the end of the year. The tax rate is 30%. For every year, working capital at the start of the year is 10% of the EBDITA earned during the year. Working capital is fully recovered at the end of the project; i.e., the level of working capital is 0 at the end of year 5. The pre-tax salvage value of the equipment at the end of year 5 is 350,000. The cost of debt is 5.5%. The equity beta is 1.20. The constant debt-to-equity ratio is 1. The market risk premium is 4% The risk free rate is 4.5% 1 1 a) Compute the cash flows for the project b) Calculate the WACC c) What is the NPV of the project