Malt Ltd is considering a new project that will require equipment costing $2,000,000. The company believes the project will generate aftertax cash ows of $350,000 per year forever, with the rst cash ow starting at the end of the rst year.

Malt Ltd will raise $400,000 by a new issue of 5-year bonds with face value of $1,000 and a yield to maturity of 6.25% pa (the otation costs of the new debt would be 2.5% of the amount raised), and $1,600,000 by a new issue of ordinary shares (the otation costs of the new share issue would be 10% of the amount raised). Malt Ltd has a beta of 1.75, the riskfree rate is 2.5% pa and the market risk premium is 7% pa. The company tax rate is 30%.

Calculate the net present value (NPV) of the new project. Explain if the company should accept this project or not. (Show answer in dollars, correct to 2 decimal places.) (Hint: follow these steps: rst calculate Ma|t's weighted average otation cost of the new fund raising, then calculate true cost of the project, then calculate WACC and then NPV of the project) 10 marks