Question
Determine the NPV of the following project for Company X. The project is equally as risky as the company itself. The project will cost $20
Determine the NPV of the following project for Company X. The project is equally as risky as the company itself. The project will cost $20 million to get running in the first year. The cash flows produced from the project will be: $1M in year 1 $2M in year 2 $4M in year 3 $5M in years 4-10 At the end of 10 years the project will end with zero salvage value. The company stock currently has a beta of 1.25 and the expected return of the market is 8%. The company currently operates with 45% debt financing and t-bills are currently returning 4%. The expected return on debt is 6.5%. The company operates in a 35% tax bracket. What is the NPV and should the company invest in this project? Why or why not?
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