Determine if should undertake project

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Problem 1: Gemini Inc an all equity firm, is considering a $1.9 million investment that will be depreciated according to the straight line method over its four year life. The project is expected to generate earnings before taxes and depreciation of $685,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four year 7.5% loan to finance the project from a local bank. All principle will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $28,000 in flotation costs which will be amortized over the four year life of the loan. If the company financed the project entirely with equity the firm's cost of capital would be 11% The corporate tax rate is 24%. Use the Adjusted Present Value Method (APV) to determine if they should undertake project

Reference no: EM132933380

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