Exercise $18$

Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt$-$equity ratio of $\mathrm{.}40,$ but the industry target debt$-$equity ratio is $\mathrm{.}35.$ The industry average beta is $1\mathrm{.}2.$ The market risk premium is $7$ percent, and the risk$-$free rate is $5$ percent. Assume all companies in this industry can issue debt at the risk$-$free rate. The corporate tax rate is $21$ percent. The project requires an initial outlay of $$785,000$ and is expected to result in a $$93,000$ cash inflow at the end of the first year. The project will be financed at the company's target debt$-$equity ratio. Annual cash flows from the project will grow at a constant rate of $5$ percent until the end of the fifth year and remain constant forever thereafter. Should the company invest in the project?