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:

$01234$

EBIT $10,010,010,010,0$

Interest $(5\%)-4,0-4,0-3,0-2,0$

Earnings Before Taxes $6,06,07,08,0$

Taxes $-2,4-2,4-2,8-3,2$

Depreciation $25,025,025,025,0$

Cap Ex $-100,0$

Additions to NWC $-20,020,0$

Net New Debt $80,00,0-20,0-20,0-40,0$

FCFE $-40,028,68,69,29,8$

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 company$$s equity cost of capital of $11\%.$ However, the project$$s incremental leverage is

very different from the company$$s historical debt$-$equity ratio of $0\mathrm{.}20.$ For this project, the

company will instead borrow $$80$ million upfront and repay $$20$ million in year $2,$ $$20$ million

in year $3,$ and $$40$ million in year $4.$ Thus the project$$s equity cost of capital is likely to be

higher than the firm$$s$,$ not constant over time$$invalidating your associate$$s calculation.$[$Hint:

For part c$)$ compute the unlevered cost of equity using the $11\%,$ cost of debt of $5\%$ and the

historical debt$-$equity ratio$]$

$($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 project$$s value from the information given?