You are considering raising dollars to invest in a project that requires an investment today of $1,000; it is a one-period project with an IRR of 12%. You will raise the dollars using a 25% debt to total assets capital structure. Debt dollars will cost 5% before tax, and equity dollars will cost 15%. Your tax rate is 40%.

1. Is the project acceptable? Why or why not this project is acceptable.

2. What rate of return for the equity investors if project is accepted? Show solution