This information is given:

Dunder Mifflin is a paper manufacturer and distributor which is investing in a new line of paper. The company needs to buy the building for US$50 million and make an initial investment of US$30 million to convert the building into a plant. Expenses are incurred today (t=0). 10 years is the expected life of the plant. The company is estimated to make sales of 5 million units per year for all of the 10 years. Fixed costs and variable costs are US$10 million each year and US$20 per unit (one ream) respectively. The companys executives have decided to set a sales price of US$30 per unit. Assume that people who buy the new paper would be new customers, i.e. introducing this paper to the market would not affect the sales of their other products. All the expenditures made for the plant today will be depreciated straight-line over 10 years (from year 1 to year 10) leaving behind a value of US$5 million, but the company believes it might be able to sell it off at US$10 million.

The company has a beta of 1.75; it is 60% financed by debt, and debt holders require a 10% rate of return on their investment. Taxes are 40%. The interest on short-term government bonds is 4%, while the market rate of return is 8% and is expected to continue.

I have based on this, calculated following:

Return on equity

WACC

Calculations in order to find the free cash flows/ operating cash flows:

NPV

Apply a financial breakeven analysis. Next, hold everything constant but the units of paper sold. At what number of units sold would the project break even?

re = : 0.4 + 1.75(0.4) = 1.1 : = 11% WACC = 48.000.000 80.000.000 * (1 0.40) * 0.10 + - 32.000.000 80.000.000 -* 0.11 = 0.08 = 8% Revenue = US$ 5.000.000 * 30 = US$ 150.000.000 Varible costs = 20 * 5.000.000 VB = US$ 100.000.000 Annual Depreciation Expense US$ (50.000.000 + 30.000.000) 5.000.000 10 Annual Depreciation Expense = US$ 7.500.000 Taxes = 0.40* (5.000.000 - 10.000.000) = US$ 2.000.000 Total CF = 10.000.000 - 2.000.000 US$ 8.000.000 = Year Revenue Fixed costs Variable costs EBITDA Depreciation EBIT Tax (40%) Net income (+Depreciation) Operating CF Investment Sale of FA Free CF 0 -80.000.000 -80.000.000 1 2 27.000.000 3 150.000.000 150.000.000 150.000.000 150.000.000 -10.000.000 -10.000.000 -10.000.000 -10.000.000 -100.000.000 -100.000.000 -100.000.000 -100.000.000 40.000.000 -7.500.000 32.500.000 40.000.000 -7.500.000 40.000.000 -7.500.000 40.000.000 -7.500.000 32.500.000 32.500.000 32.500.000 13.000.000 13.000.000 13.000.000 13.000.000 19.500.000 19.500.000 19.500.000 19.500.000 7.500.000 7.500.000 7.500.000 7.500.000 27.000.000 27.000.000 27.000.000 27.000.000 27.000.000 4 27.000.000 27.000.000 5 150.000.000 -10.000.000 -100.000.000 40.000.000 -7.500.000 32.500.000 13.000.000 19.500.000 7.500.000 27.000.000 27.000.000 6 7 27.000.000 8 27.000.000 150.000.000 -10.000.000 -7.500.000 150.000.000 150.000.000 150.000.000 150.000.000 -10.000.000 -10.000.000 -10.000.000 -10.000.000 -100.000.000 -100.000.000 -100.000.000 -100.000.000 -100.000.000 40.000.000 40.000.000 40.000.000 40.000.000 40.000.000 -7.500.000 -7.500.000 -7.500.000 -7.500.000 32.500.000 13.000.000 19.500.000 7.500.000 27.000.000 32.500.000 32.500.000 32.500.000 32.500.000 13.000.000 - 13.000.000 13.000.000 13.000.000 19.500.000 19.500.000 7.500.000 19.500.000 19.500.000 7.500.000 27.000.000 27.000.000 7.500.000 7.500.000 27.000.000 27.000.000 9 27.000.000 10 27.000.000 8.000.000 35.000.000 NPV = -80.000.000 + + + 27.000.000 27.000.000 27.000.000 27.000.000 + + + (1 + 0.8) (1 + 0.8) (1 + 0.8) (1 +0.8) 4 27.000.000 (1 + 0.8)5 35.000.000 (1 + 0.8) 0 + 27.000.000 27.000.000 + (1 + 0.8) 6 (1 + 0.8)7 = US$ 104.877.745, 67 + 27.000.000 27.000.000 + (1 + 0.8)8 (1 + 0.8)