Determined that the projects unlevered cash flow

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NEC Inc is considering a $50 million project in its power system division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that the project’s unlevered cash flow will be $3.5 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: issuing 10-year bonds or issuing common stock. NEC’s pre-tax cost of debt is 7.3 percent, and its cost of equity is 10.9 percent. The company’s target debt-to value ratio is 80 percent. The project has the same risk as NEC’s existing business. NEC is in the 34 percent tax bracket. Should NEC accept the project?

Reference no: EM13766870

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