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Question 10: Calculate the expected cash flows from the Android01 project based on the information provided.

Question 11: Calculate the NPV for a required rate of return of 6.5 percent. Also calculate the IRR and the Payback Period.

One of your responsibilities as CFO is to determine the suitability of new and current products. Your CEO has asked you to evaluate Android01. That task will require you to combine data from your production analysis from Project 2 with data from a consultant’s study that was done last year. Information provided by the consultant is as follows:

initial investment: $120 million composed of $50 million for the plant and $70 million net working capital (NWC)

yearly expenses from year 1 to year 3: $30 million

yearly revenues from year 1 to year 3: $0

yearly expenses from year 4 to year 10: $55 million

yearly expected revenues from year 4 to year 10: $95 million

yearly expenses from year 11 to year 15: $60 million

yearly expected revenues from year 11 to year 15: $105 million

You are to calculate NPV using the “expected values”. The actual cash flow may be variable (risky) and that is the reason why the discount rate is greater than the riskless rate.

Question 13: Which particular capital structure should be chosen for the spin-off?

Your firm receives all the proceeds from the sale debt and equity. Since the firm is selling debt and equity, it wants to sell using the capital structure that provides your firm with the most money (sum of whatever debt and equity sells for).

Debt buyers receive debt that pays them coupons of $2 million a year, and $30 million after 20 years (these are expected values as the coupons and principal payments are not riskless, the debt buyers realize the firms could default). They price the debt using a discount rate of 4 percent. Equity buyers receive expected dividends of $3 million starting from year 5, and growing at a rate of 4 percent per year (a growing perpetuity). They price the equity using a discount rate of 7.5 percent.

Debt buyers receive debt that pays them coupons of $1 million a year, and $12 million after 20 years (these are expected values as the coupons and principal payments are not riskless, the debt buyers realize the firms could default). They price the debt using a discount rate of 3.5 percent. Equity buyers receive expected dividends of $3.9 million starting from year 5, and growing at a rate of 4.5 percent per year (a growing perpetuity). They price the equity using a discount rate of 7 percent.

Question 10: Calculate the expected cash flows from the Android01 project based on the information provided.

Question 11: Calculate the NPV for a required rate of return of 6.5 percent. Also calculate the IRR and the Payback Period.

Question 13: Which particular capital structure should be chosen for the spin-off?