Hamilos Worldwide is considering a $5 million expansion of their existing business. The initial expense will be depreciated straight-line over 5 years to zero salvage value; the pretax salvage value in year 5 will be $500,000. The project will generate pre-tax gross earnings of $1,500,000 per year, and not change the risk level of the firm. Hamilos can obtain a 5-year 12.5% loan to partially finance the project. If undertaken, this project should maintain a target D/E ratio of 1.50. If the project were financed with all equity, the cost of capital would be 15%. The corporate tax rate is 30%, and the risk-free rate is 6%. The project will require a $100,000 investment in net working capital.

a. Compute the NPV using WACC.

b. Alternatively, suppose you finance the project with 3 million in debt. What is the APV and would you accept the project?