You are valuing a new project for your company. The project will produce widgets which sell for $6.50 per widget. The manufacturing cost is $2 per widget. You estimate that the project will sell 2.5M widgets per year for the next four years and then shut down. The project will require you to purchase $3M in machinery which you will depreciate down to zero over four years. The machinery will have a resell value of $400k at the end of the project. You will need $500k in cash set aside for this project at its start, and increase cash holdings by $200k per year for the life of the project. The firm's cost of debt is 3.2% and the corporate tax rate is 35%. You will maintain a constant D/V ratio of 0.60 for the project. The expected return of the market is 7% and the risk-free rate is 3%. To value the project, you have identified three comparable firms listed below. You reside in a country where interest payments to debt holders are not tax deductible.

Company

Firm A Firm B Firm C Average

Equity Beta 2.10 2.34 3.60 2.68

D/E Ratio 0.4 0.3 2.0 0.9

Debt Beta 0.16 0.12 0.24 --