TataCoo Inc is facing a new investment opportunity. The project will require $ 15 million initial investment and is expected to generate volatile cash flow during the first six years.

The estimated after-tax cash flow during year 1 through 6 is given below. From year 7, the after-tax cash flow is expected to grow at a constant growth rate of 2% per year.

The company's current balance sheet shows a $2 billion debt in book value and the debt is trading at 90% of book value. The debt beta is 0.6.

The market value of equity of the company is $3 billiion and the equity beta is 2.5.

The company has kept a stable capital structure in the past. To take this new investment project, the company will issue $10 million new debt at the current borrowing cost.

The underwriter charges 1.5% of debt issue as their commission.

The company plans to gradually reduce its borrowing in the first 6 years and then return to its previous stable capital structure.

Debt repayment scchedule is given below. Assume the corporate tax rate is 21%.

Suppose the risk free rate is 5% and market risk return is 9%.

A. What is the unlevered beta of the company (unlevered beta=asset beta)?

B. CalcuLAte the required return on assets (unlevered cost of capital), levered cost of capital (return on equity with leverage) and after-tax WACC.

C. Calculate the APV of this project.

			Cashflow Forecast in $M
			0	1	2	3	4	5	6
		Free cash flow	-13.0	-2.0	1.2	1.4	1.8	1.9	2.0
		Debt Balance at year end (in $ million)	10.0	9.8	9.5	9.0	8.5	8.3	8.0