You are a consultant who was hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $150 million (time 0). The product will generate free cash flow of $8 million the first year, and this free cash flow is expected to grow at a rate of 3.5% per year. Markum has an equity cost of capital of 12%, a debt cost of capital of 5%, and a marginal tax rate of 40%. Markum plans to finance the project with a constant D:V ratio of 0.5.

a) Calculate Markums WACC

b) Calculate the NPV of the new product line using the WACC method.

c) How much debt will Markum initially take on as a result of launching this product line?

d) How will Markums total debt change during the projects life?

e) Calculate the NPV of the new product line using the APV method.

f) How much of the projects value is attributable to the present value of the interest tax shields?

Instead of a constant D:V ratio, Markum now plans to finance the project with perpetual debt of $100 million that has an interest rate of 5%. i.e. it plans to keep the debt constant at the initial amount.

g) Calculate the NPV of the project using the APV method.

h) Explain briefly the reason for the difference in the project value between the two cases.