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Cherry Creek Inc. is considering expanding to another city; the project will cost $50,000 and is expected to generate after-tax cash flows of $10,000 per

Cherry Creek Inc. is considering expanding to another city; the project will cost $50,000 and is expected to generate after-tax cash flows of $10,000 per year in perpetuity.

The firm has a target debt/equity ratio of 0.5 and the new equity has a flotation cost of 10% and a required return of 15%, while new debt has a flotation cost of 5% and a required return of 10%. The tax rate is 34%.

  1. Calculate the cost of capital.
  2. Calculate the flotation cost.
  3. Calculate the initial investment.
  4. Calculate the NPV for the project after adjusting for flotation costs.
  5. What do you conclude?

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