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Napier Paper Inc. is deciding whether to build a new manufacturing plant. The proposed project would...

Napier Paper Inc. is deciding whether to build a new manufacturing plant. The proposed project would have an upfront cost (at t = 0) of $30 million. The project's cost can be depreciated on a straight-line basis over three years. Consequently, the depreciation expense will be $10 million in each of the first three years, t = 1, 2, and 3. Even though the project is depreciated over three years, the project has an economic life of five years. The project is expected to increase the company's sales by $20 million. Sales will remain at this higher level for each year of the project (t = 1, 2, 3, 4, and 5). The operating costs, not including depreciation, equal 60 percent of the increase in annual sales. The company's tax rate is 34.0 percent. The company is very profitable, so any accounting losses on this project can be used to reduce the company's overall tax burden. The project does not require any additions to net operating working capital. The company estimates that the project's after-tax salvage value at t = 5 will be $1.2 million. The project is of average risk, and, therefore, the CFO has decided to discount the operating cash flows at the company's overall weighted average cost of capital of 10.0 percent. However, the salvage value is more uncertain, so the CFO has decided to discount it at 12.2 percent. Using the information above about Napier Paper Inc., answer the four-part question (equal weight for each part):

(a) What is the operating cash flow (or free cash flow) in year 1? $ millions (Give answer to 2 decimal places)

(b) What is the operating cash flow (or free cash flow) in year 5? \$ millions (Give answer to 2 decimal places)

(c) What is the present value of the project’s after-tax salvage value? \$ millions (Give answer to 2 decimal places)

(d) What is the net present value (NPV) of the entire proposed project? \$ millions (Give answer to 2 decimal places)

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(a) What is the operating cash flow (or free cash flow) in year 1? $5.28 Millions

(b) What is the operating cash flow (or free cash flow) in year 5? $6.48 Millions

(c) What is the present value of the project’s after-tax salvage value? $19.31 Millions

(d) What is the net present value (NPV) of the entire proposed project? -$10.68 Millions

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