XYZ Company has a current market value of $1 million, half of which is debt. Its current WACC is 9%, and the tax rate is 40%. The firm is considering a new project which costs $500,000 that will be financed completely with debt and has the same operating risk as the firms existing projects. Finally, the project is expected to yield an after-tax rate of return of 8.5% per year.

a.What is the appropriate cost of capital to use in considering this project? Show your work.

b.Should the project be accepted? Why?