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You work as the financial manager of Saskatoon Delicious Pasta (SDP). You are considering a project that will cost $800,000. The project will generate after-tax

  1. You work as the financial manager of Saskatoon Delicious Pasta (SDP). You are considering a project that will cost $800,000. The project will generate after-tax cash flows of $250,000 per year for 5 years and has no salvage value after the 5 year life. The WACC is 14%.

    1. a) Using the net present value rule, should you accept or reject the project? (5 marks)

    2. b) After considering the project further, you realize that you will have to raise money from the market. Your firms target Debt to Equity ratio (D/E) is 40%. In addition, you determine that the flotation cost for equity is 8% and the flotation cost for debt is 6%. Will the new information change the decision you made earlier in (Part a). (5 marks)

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