Calculate Net Present Value of the project

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Question - Clifford Chance is a large U.K. firm with the before tax cost of debt of 14%. The risk-free rate of interest on 10-year Treasury bonds is 5%. The expected return on the market portfolio is 8%. After effective taxes, Clifford Chance's effective tax rate is 20%. Its optimal capital structure is 70% debt and 30% equity.

If Clifford Chance's beta is estimated at 1.4, what is its weighted average cost of capital?

This firm has collected 50,000 GBP from U.K. stock and bond markets by using the weighted average cost of capital calculated in step (a). It has invested this fund on a 3-year project in U.K. and earned the cash flows of 10,000, 15,000, and 20,000 for the first, second, and third years of the project, respectively. Calculate Net Present Value of the project and provide a decision whether this project is acceptable for investment?

Reference no: EM133002697

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