Question
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
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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 cash flows of $250,000 per year for 5 years and has no salvage value after the 5 year life. The WACC is 14%.
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a) Using the net present value rule, should you accept or reject the project? (5 marks)
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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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