Project valuation with WACC

Reed & Company has 1,900,000 shares traded at a market value of $71.50 per share; its debt outstanding has an estimated market value of $60 million. The firm is rated BBB. The risk-free government bond rate is 1.40%, and BBB bonds currently trade with a credit spread of 2.67% over the risk-free rate. The tax rate is 35%. To calculate the cost of equity, we assume an equity risk premium of 5.5%, an industry premium of 0.76%, a 2.24% size premium and a 1.98% company-specific premium.

The company is valuing an investment project with the following characteristics:

Initial investment $3,600,000

Number of years 4

Depreciation schedule Straight-line over 4 years

EBIT taxes: $1,136,364 (year 1); $1,193,259 (year 2); $1,352,299 (year 3); $1,619,914 (year 4).

Change in working capital: $3,289 (year 1); $31,990 (year 2); $28,752 (year 3); $0 (year 4).

Your task is to value the investment project. Please answer the following questions:

A. What is the debt ratio?

B. What is the equity ratio?

C. What is the cost of equity?

D. What is the pre-tax cost of debt?

E. What is the after-tax cost of debt?

F. What is the cost of capital (WACC)?

G. What is the Present Value of the cash flows?

H. What is Net Present Value?

I. What is the Internal Rate of Return?

J. Should the project be done? Briefly explain why or why not.