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The following data is available about a firm which is considering undertaking a project. 1 = 8% K_u = return on assets = 10% K_e=
The following data is available about a firm which is considering undertaking a project. 1 = 8% K_u = return on assets = 10% K_e= return on equity = 12% 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 o. In years one and two the firm expects to have operating cash flows of $200 each year, there are no fixed costs What is the APV of the project? Should the firm undertake the project? Explain
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