Using EXCEL**

Assume an oil company is planning for a ten-year project that requires an initial investment of $100 million. This project is expected to generate a positive cash flow of $11 million at the end of the first year and the cash flow is expected to grow at 10% of the holding period return each year. For example, at the end of the second year, it will generate $11*(1+10%) = $12.1.

1. Please calculate the expected cash flows for the next ten years.

2. Assume the company raised capital from both equity (40%) and debt (60%). The

   required return for equity is 12%, and the required return for debt is 4%. What is the

   WACC of the company?

3. Using the WACC from 3.b as the discount rate, calculate the NPV of the company, and

   explain if they should undertake this project. Why?

4. The management team of the oil company believes they should use a discount rate,

   12%, which is higher than the WACC to represent the equity investors expectations. Given this discount rate, calculate the NPV of the project and explain if they should undertake this project. Why?

5. Discuss at what discount rate this project will break even (NPV = 0).