You are considering a geographic expansion into the European market for Canopy Pharmaceuticals. Below are the incremental cash flows for the Canopy project for you to use in your analysis. Assume Canopy's marginal tax rate is 35%, their cost of capital is 15.7 % and an expected growth rate of 5% after 2003.

1. Calculate the free cash flows for 1998 2003.
2. Calculate the terminal value of the Canopy project in 2003 and the adjusted free cash flow value for 2003. (HINT: Use the Gordon or Growing Perpetuity Model to calculate the terminal value).
3. Calculate the NPV, the IRR and the payback period for the Canopy project and recommend whether Canopy should go forward with the expansion project or not.

# Net Sales Cost of Sales Depreciation SG&A R&D EBIT Income Tax (35%) Net Earnings Depreciation Operating Cash Flows 1998 8,500 3,100 100 3,500 1,100 700 245 455 1999 15,000 5,500 100 5,410 2,800 1,190 417 774 2000 35,500 13,900 100 6,400 4,100 11,000 3,850 7,150 2001 46,000 18,000 100 5,300 5,400 17,200 6,020 11,180 2002 52,000 20,000 100 7,200 6,500 18,200 6,370 11,830 2003 60,000 24,400 100 7,800 7,000 20,700 7,245 13,455 Net PPE Working Capital (906) (2,030) (1394) (780) (900) (2457) (800) (1267) (300) (738) (200) (912) Terminal Value Free Cash Flows