construct a pro forma for the following firm a 3 year project costs 150 year 1 and p 539165

Construct a pro forma for the following firm: A 3-year project costs $150 (year 1), and produces $70 in year 1, $60 in year 2, and $55 in year 3. Depreciation, both real and financial, is 3 years. Projects of this riskiness (and with this term structure of project payoffs) have an 18% cost of capital. The marginal corporate income tax rate is 40%.

a) Assume that the firm is 100% equity financed. Construct the pro forma, and compute expected project cash flows.

b) Compute the Project IRR.

c) Compute the project NPV.

d) Assume that this firm expects to receive an extra bonus of $2 in years 2 and 3 from a benevolent donor.

What would be the project’s cash flows and IRR now?

For the remaining questions, assume that the firm instead has a capital structure financing $50 in debt raised in year 1 at a 10% (expected) interest rate. There is no interest paid in year 1, Justin year’s 2 and 3. The principal is repaid in year 3.

e) Construct the pro forma now. What is the IRR of this project?

f) From the pro forma, what is the NPV of the debt-financed project?

g) Compute the NPV via the APV method.

h) Via the APV method, how much would firm value be if the firm would have taken on not$50 but $40 in debt (assuming the same interest rate of 10%)?

i) How much money must the equity provide in year 1? What is the debt ratio of the firm? Does it stay constant over time? Is this a good candidate firm for the WACC method?