Step 1: for the project to add value, it must have an NPV greater than or equal to zero. To determine the minimum total after-tax earnings, we need to determine the WACC of the firm. Cost of debt: (before tax)=300,000 $3 million = 10% = After-tax cost of debt 10% * (1-.35) = 6.5% Cost of equity: = $25 $5/(k) cost of equity = 20% WACC = (20%*2.5 + 6.5%*3)/5.5 = 12.6364% The project will need to generate an after-tax cash flow of 12.6364%*$1 million = $126,363.6364. On a pre-tax basis, the cash flow needs to be $194,405.5944 per year. Demonstrate that this cash flow satisfies the requirements of each capital provider: The fraction of the project financed by debt = 3/5.5 = 54.5455% EBIT Interest on debt $194,405.5944 .545455*1m*.10 $54,545.4546 .35*(E-I) $48,951.0490 Earnings available for shareholders $90,909.0908 Tax on earnings = Fraction of project financed by common stock 45.4545% Required cash flows that can be given to shareholders = 0.454545*1 million * .20 = $90,909. Investing in a project that earns at least the WACC will satisfy the requirements of all the providers of capital.