You are a consultant who was hired to evaluate a new product line for Gupta Enterprises. The upfront investment required to launch the product is

$ 8

million. The product will generate free cash flow of

$ 0.77

million the first year, and this free cash flow is expected to grow at a rate of

4 %

per year. Gupta has an equity cost of capital of

10.6 %

,

a debt cost of capital of

7.14 %

,

and a tax rate of

32 %

.

Gupta maintains a debt-equity ratio of

0.40

.

a. What is the NPV of the new product line (including any tax shields from leverage)?

b. How much debt will Gupta initially take on as a result of launching this product line?

c. How much of the product line's value is attributable to the present value of interest tax shields?