In problems where no equity risk premium or tax rate are provided, please use an equity risk premium of 5.5% and a tax rate of 40%.

1. You have been given the following information on a project:

It has a five-year lifetime

The initial investment in the project will be $25 million,

Year % of Depreciable Asset

1 40

2 20

3 14.4

4 13.3

5 13.3

The revenues are expected to be $20 million next year and to grow 10% a year after that for the remaining four years.

The cost of goods sold, excluding depreciation, is expected to be 50% of revenues.

The tax rate is 40%.

1. Estimate the pretax return on capital by year and on average, for the project.

b. Estimate the after-tax return on capital, by year and on average, for the project.

c. If the firm faced a cost of capital of 12%, should it take this project?