You are on your way to an important budget meeting. In the elevator, you review the project valuation analysis you had your summer associate prepare for one of the projects to be discussed: Looking over the Table, you realize that while all of the cash flow estimates are correct, your associate used the flow-to-equity valuation method and discounted the cash flows using the companys equity cost of capital of 11%. However, the projects incremental leverage is very different from the companys historical debt-equity ratio of 0.20. For this project, the company will instead borrow $80 million upfront and repay $20 million in year 2, $20 million in year 3, and $40 million in year 4. Thus the projects equity cost of capital is likely to be higher than the firms, not constant over timeinvalidating your associates calculation.

	0	1	2	3	4
EBIT		10,0	10,0	10,0	10,0
Interest (5%)		-4,0	-4,0	-3,0	-2,0
Earnings Before Taxes		6,0	6,0	7,0	8,0
Taxes		-2,4	-2,4	-2,8	-3,2
Depreciation		25,0	25,0	25,0	25,0
Cap Ex	-100,0
Additions to NWC	-20,0
Net New Debt	80,0	0,0	-20,0	-20,0	-40,0

FCFE

-40,0

28,6

8,6

0,2

9,8

(a) What is the present value of the interest tax shield associated with this project? (b) What are the free cash flows of the project? (c) What is the best estimate of the projects value from the information given?