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Sovrano Caf is considering a major expansion of its business. The details of the proposed expansion project are summarized below: The company will have to
Sovrano Caf is considering a major expansion of its business. The details of the proposed expansion project are summarized below:
- The company will have to purchase $950,000 equipment, that require installation cost and transportation cost equal $100,000.
- The cash inflow for the following 5 years are as following:
Year 1: $ 350,000
Year 2: $ 450,000
Year 3: $ 550,000
Year 4: $ 450,000
Year 5: $ 550,000
- The companys tax rate is 40%
- The Company finances its operations with 40% debt and 60% equity. The cost of debt is 16%, the banks certificates of deposit pay interest equal 14%, while the market risk premium is 20%.
What do you recommend?
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