Your first task as a corporate finance analyst is to advice Lime on a potential investment project. Lime has operated a fleet of 5000 scooters in Rome for the last few years and is now considering expanding its current service by also offering scooters in Milan. Today is time zero and the firm plans to buy 2500 new electric scooters at a price of EUR 4,000 per scooter which are going to be depreciated straight-line over 5 years to a salvage value of zero. At the end of year 5, Lime expects to be able to sell the used scooters for EUR 250 per scooter. Each scooter has expected revenue of EUR 1500 per month and the annual maintenance costs amount to EUR 500 per scooter. The project requires an initial investment of EUR 50,000 in working capital which is recovered at the end of year 5.

The companys capital structure consists of both debt and equity. The firm has 2,000 bullet bonds outstanding with annual coupon payments, 10 years to maturity, 7% yield-to-maturity, EUR 1,000 face value, and the bonds currently trade at their face value. The firm also has 100,000 common shares outstanding which have just paid an annual dividend of EUR 6 per share. The annual dividend growth rate is 1% and the firms equity beta is 2. The risk-free rate is 2%, the expected market risk premium is 7%, and the corporate tax rate is 20%.

1. What is the projects free cash flow in each of the 5 years?
2. What is the annual coupon payment on the firms bonds?
3. What is the stock price in year 0?
4. Calculate the discount rate the firm should use to evaluate the investment project.
5. Calculate the projects net present value (NPV). Explain if Lime should invest in the new project.
6. Suppose that Lime decided to invest in the Milan project. At the end of year 2, another firm specialized in scooters offers to buy the 2500 used electric scooters from Lime. What is the lowest sales price per scooter that Lime should be willing to accept?