In 2021, the firm is considering a new big project, which requires an initial investment in equipment of 2,700,000 and also an initial investment in working capital of 1,000,000 (at t = 0). The investment will be fully financed by issuing a 4year bond with 10% annual coupon and a yieldtomaturity of 20%. You expect the project to produce sales revenue of 2,400,000 per year for three years. You estimate manufacturing costs at 60% of revenues. (Assume all revenues and costs occur at yearend) The equipment fully depreciates using straightline depreciation over three years. At the end of the project, the firm can sell the equipment for 1,000,000 and also recover the investment in net working capital.

a. Considering the change caused by the new project in the firms capital structure, recalculate the new cost of capital for the firm (assume the equity beta of 1.2 is not affected).

b. Find the projects payback period, IRR, and NPV.

c. Should the company invest in the project? Explain.

d. Does your decision in (b) depend on the way the project is financed? If so, how?