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Determine if the project should be undertaken

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Question - Glam Co., an unleveraged firm, is considering a $2.4 million investment that will be depreciated according to the straight-line method over it's four-year life. The project is expected to generate earnings before taxes and depreciation of $850,000 per year for 4 years. The investment is consistent with the current risks of the firm. The company can obtain a four-year 9.5% loan to finance the project. All principal will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $24,000 in flotation fees (issuing fees) which will be amortized over the four year life of the project. If the firm finances the project with 100% equity, the RS is 13%. The corporate tax rate si 30%. Using the APV method, determine if the project should be undertaken.

Reference no: EM132905920

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