1. Polar Inc. is considering a project that will provide the following benefits:

Year 1: $350,000

Year 2: $650,000

Year 3: $800,000, this will grow at 2% indefinitely

The firm has a target debt to equity ratio of 0.9

The 30 year Government of Canada rate is 1.5%

The Companys Beta is 1.3

The return on the entire equity market is 7%

The company has debt outstanding with 22 years to maturity that is quoted at 98 percent of face value. The issue makes semiannual payments and has an embedded cost of 5% annually. The par value is $1000. The corporate tax rate is 35%.

This project is riskier than usual projects that the firm undertakes. Management uses its judgement to apply an adjustment factor of +5% to the cost of capital of for this riskier project.

Under what circumstances should the company take on this project?