After the recent food poisoning outbreak, Bullrito is considering a new marketing project to improve its brand image. At time 0, this project requires an operating expense of $40M to make a TV commercial. Bullrito plans to air this commercial over the next two years. Thanks to this new commercial, you expect that the firm's EBIT will increase by 50.40M in year 1 and by 52.92M in year 2. You want to find the NPV of this project using two different methods. Bullrito's D/E ratio is 2 and the firm plans to keep this ratio fixed. Bullrito's cost of debt is 3%. Under the current capital structure, the firm's cost of equity is 15%. Bullrito's corporate tax rate is 30%. PART 0; Free cash flows The project does not incur any incremental depreciation, CAPEX, nor net working capital requirements. The EBIT is given as the following. Find the free cash flow for each year. Year O EBIT -$40M Free cash flow Year 1 $50.40M Year 2 $52.92M
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Step 1
To calculate the free cash flow, we need to subtract the capital expenditures (CAPEX) from the cash flow from operations (CFO). Year 0: -$40M (Given) Year 1: $50.40M (Given) Year 2: $52.92M (Given) Show more…
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