Question
National Electric Company (NEC) is considering a $53 million project in its power system division. Tom Edison, the companys chief financial officer, has evaluated the
National Electric Company (NEC) is considering a $53 million project in its power system division. Tom Edison, the companys chief financial officer, has evaluated the project and determined that the projects unlevered cash flows will be $4.1 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: issuing 10-year bonds or issuing common stock. The companys pretax cost of debt is 5.9 percent and its cost of equity is 10.3 percent. The companys target debt-to-value ratio is 60%. The project has the same risk as the companys existing businesses and will support the same amount of debt. The tax rate is 21 percent. What is the NPV of the project and should NEC accept the project?
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