Project that requires an initial cash outlay for equipment

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Reference no: EM13894437

Carter & Carter (C&C) is considering a project that requires an initial cash outlay for equipment of $6.3 million. The equipment will be depreciated to a zero book value over the 4-year life of the project. At the end of the project, C&C expects to sell the equipment for $1 million. The project will produce cash inflows of $1.5 million a year for the first 2 years and $2.2 million a year for the following 2 years. C&C has a cost of equity of 12 percent and a pre-tax cost of debt of 8 percent. The debt-equity ratio is .75 and the tax rate is 35 percent.

1. What is the company’s WACC?

2. At the company’s WACC (as computed in part a), what is the NPV of the project?

3. If the company has decided that they will accept the project if the project’s internal rate of return (IRR) exceeds the firm’s weighted average cost of capital (WACC) by 2 percent or more, should the project be considered (i.e. accepted)?

Reference no: EM13894437

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