Production of discount hard disks

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You are the CFO of a small company devoted to the production of discount hard disks. Given the information you have, your current estimate for the value of the existing assets-in-place for your company is $10m. You have spotted a new investment project which costs $2m and has expected earnings of $.6m a year in perpetuity, starting one year from now. The risk adjusted discount rate appropriate for this project is 20%. You have no cash, and you plan to finance this project by issuing new equity in a general cash offer. At the present time the marketplace is not aware of this project, and it is less optimistic than you on the value of the existing assets-in-place at your company. In fact, the market currently evaluates your company at only $8m. On the other hand, when presented with the project the market will agree with your estimates of future earnings for the project. The only disagreement will be on the value of your already existing assets-in-place. Disregard all taxes.

a) Should you take this project?

b) How your answer will change, if the cost of the project is $2.8m?

c) Is there a better way to finance this project? Discuss.

Reference no: EM131044217

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