Question
The following data is available about a firm which is considering undertaking a project. = 8% Ku = return on assets = 10% Ke= return
The following data is available about a firm which is considering undertaking a project. = 8% Ku = return on assets = 10% Ke= return on equity = 12% T = Tax rate = 30% Debt-to-equity ratio = 3 Risk-free rate = 3% Market risk premium = 8% The 2-year project requires equipment that costs $300. The debt is an interest-only loan with a maturity of 2 years and annual interest payments. The equipment will be depreciated straight-line to zero over the 2-year life of the project. There will be a pre-tax salvage value of $100. There are no other start-up costs at year 0. In years one and two the firm expects to have operating cash flows of $200 each year; there are no fixed costs. (a) (5 points) What is the NPV of the project using the WACC methodology? Should the firm undertake the project? Explain.
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