You have been asked to analyze whether Rogers, a telephone company, should invest in a new telecommunication infrastructure with an expected life of 4 years. Rogers has already spent $ 2 million developing part of the infrastructure; this expense was capitalized and will be depreciated straight line over the next four years. Rogers will have to invest an additional $5 million if it wants to commercially use the infrastructure, and this investment will also be depreciated straight line over four years to a salvage value of $ 1 million at the end of the 4th year. Based upon a market study, Rogers concludes that it can generate revenues of $ 6 million next year which will be growing at 12% a year over the next 4 years; operating expenses (other than depreciation) are expected to be 40% of revenues each year. The current overall annual G&A expenses of Rogers are $5 million. The project is expected to increase G&A expenses by 10% but Rogers plans to allocate $1 million G&A expenses a year to this project. Rogers has a beta of 0.90 but the beta that better reflects the risk of this project is 1.30. The riskless rate is 5% and the market risk premium is 6%. The tax rate is 40%.

1. Estimate the cost of equity that should be used for this project ( 2marks)

2. Estimate the incremental after-tax cash flows you will have on this investment each year for the next 4 years. (10 marks)

3. Estimate the net present value of this investment. (3 marks)