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You have been asked to analyze whether Telco Inc, a computer manufacturer, should invest in producing new software. Telco has already spent $ 8 million developing pieces of the software; this expense was capitalized and will be depreciated straight line over the next four years. Telco will have to invest an additional $ 17 million if it wants to commercially develop the software, and this investment will also be depreciated straight line over four years. Based upon a market study, Telco concludes that it can generate revenues of $ 27 million every year for the next 4 years; operating expenses (other than depreciation) are expected to be 65% of revenues each year. Telco does expects its overall annual G&A expenses, which are $10 million, currently to change as a result of investing in the software business. Telco accountants estimated that 20% of G&A expenses will come from the project. . . Telco has an unlevered beta of 1.35 (bottom-up beta for computer manufacturers) but the unlevered beta for computer software companies is 1.85 The market value of equity for Telco is $ 250 million and the market value of debt is $ 150 million. Telco plans to maintain this debt to capital rato for this project. Telco is BBB rated and the default spread on BBB rated bonds is 4%.. The riskless rate is 2% and the market risk premium is 7%. The tax rate is 35%. a. Estimate the cost of capital for this project. b. Estimate the present values of the incremental cash flows on this project. c. Estimate the net present value of this project. O a. WACC = = 11.68% PVs of FCFFs = -17 ; 2.55; 2.87; 2.28 ; 0.75 NPV = -0.26 O b. WACC = 7.26% PVs of FCFFS = -17; 4.55; 3.87; 3.28; 2.75 NPV = 0.46 O c. WACC = 9.86% PVs of FCFFs = -17; 6.55; 5.87 ; 5.28 ; 4.75 NPV = 2.46 O d. WACC = 13.96% PVs of FCFFs = -17:5.55: 4.87: 4.28 ; 3.75 NPV = 1.46