You are charged with making the decision on a capital investment project.

The initial investment is $20,000. The resulting cash flows from the project for the next

5 years are: yr.1 $5,000, yr. 2, $6,000, yr.3 $7,000, yr. 4 $4,000, yr.5 $5,000.

The firm has a ratio of debt to equity of 50%. The rate on the outstanding debt is 12% and the required rate on equity is found in problem 4. The marginal tax rate is 40%. Do you make the investment? Why or why not? Show your calculations.

Rate on equity is 15.6 percent