A. Unitron Corp. is considering project Z, which costs $50 million and offers an annual after-tax cash flow of $7.5 million in perpetuity. The project is in an industry that has greater market risk than Unitrons typical projects. Unitrons company weighted-average cost of capital, based on its typical projects, is 15%. Should Unitron Corp. accept project Z?

Yes, because the NPV of the project is positive. No, because a zero-NPV project is a waste of resources. Yes, because a zero-NPV project is marginally acceptable. No, because the NPV of the project is negative. Use the equation for a perpetuity to solve for the IRR:

B. Unitron Corp. is considering project Z, which costs $50 million and offers an annual after-tax cash flow of $7.5 million in perpetuity. The project is in an industry that has greater market risk than Unitrons typical projects. Unitrons company weighted-average cost of capital, based on its typical projects, is 15%. Should Unitron Corp. accept project Z?

C. A firm is considering an average-risk project with an IRR of 6%. The firms cost of debt (KD) is 5%, its cost of equity (KE) is 12%, and its tax rate (t) is 20%. The target debt ratio (D/(D+E)) for the project, in market values, is 0.5. The firm should:

accept the project only if it can be completely financed with equity reject the project regardless of the financing method accept the project regardless of the financing method accept the project only if it can be completely financed with debt

D. Florida Corp. is calculating the appropriate rate for discounting cash flows on a project valued using the APV method. Floridas target debt ratio (D/(D+E)) in market value terms is 50%, and the yield-to-maturity on its outstanding debt is 6%. A comparable firm has an equity beta of 1.4 and a debt ratio (D/(D+E)) of 40%. Assume a risk-free rate of 5% and a market risk premium of 8%. Floridas tax rate is 40%. What discount rate should Florida use?