You are the CEO of Marcus Inc., a producer of high-end printing paper with an emphasis on environmentally friendly production methods. One of your employees has proposed a significant expansion of your product line. The expansion would require an initial investment of $8m into Property, Plant, and Equipment (PPE) and into Net Working Capital (NWC). The expansion is expected to generate Earnings before Interest and Taxes (EBIT) of $1.1m in the first year. The EBIT from the expansion is expected to grow at a rate of 3% per year in perpetuity. Future investments into PPE and NWC caused by the expansion are expected to equal depreciation in each year. The cash flows from the expansion have the same risk characteristics as the cash flows from your already existing products.

The corporate tax rate of Marcus Inc. is 35%. Ignore personal taxes and all other imperfections associated with debt financing. You have estimated an equity cost of capital for Marcus of 13.5% and a debt cost of capital of 7%. Marcus has always maintained a constant debt-equity ratio of 0.3.

Part A: Assume that the expansion project is financed in the same manner as the rest of Marcus. This means that the project will be financed so that the Debt/Equity ratio of Marcus will remain at 0.3. What is the NPV of the project under this assumption?

Part B: How much additional debt will Marcus need to borrow initially because of the expansion project, if it is financed in the same manner as the rest of Marcus?

Part C: Assume instead that the expansion project is financed solely by issuing new equity to investors. This means that the Debt-Equity ratio of Marcus will decrease. What is the NPV of the project under this assumption?

Part D: Assume that, instead of the financing options considered in parts A and C, the expansion project is funded by issuing $1.8m in debt and financing the rest with equity. The dollar amount of debt outstanding for the expansion project will be kept constant in perpetuity. That is, the $1.8m will be rolled over into new debt whenever the old debt matures. What is the NPV of the project under this assumption?