United Water Services, Inc, a developer of local area water systems serving residential and commercial customers, has identified a potential opportunity for capital investment. UWSI is considering building a water system to serve customers in southwestern Faulkner County. The company has gathered the following company and project information.

Project cost $ 2.5 million

Annual After Tax Cash flows $ .75 million

Life of project 7 years

Marginal Tax Rate 34 %

The capital structure of UWSI is as follows:

Debt(bonds) $ 20.0 million

Common equity $ 30.0 million

Debt/bond information:

Coupon rate 10%

Par value 1000.

Years to maturity 6

Current Market price 1100.

Common stock information:

Beta .8

Market return 15.0 %

Risk-free rate 2.25 %

Please make a recommendation to accept or reject the project. Complete the following steps.

1. cost of debtk_b--find the yield to maturity on the bonds
2. CAPMuse the CAPM to calculate k_cs
3. WACC--k_WACC
4. NPV, IRR, and Payback
5. Decision? Why