Should this project be accepted

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Question - Assume a company with 30% debt and 70% equity capital structure is considering a project that requires initial investment of $1,000,000. The project's net operating cash flow for the first year is $50,000 and it grows at 15%, 12%, and 10% in subsequent three years. After that it grows at a constant 5% annual rate into perpetuity. The company's cost of debt is 8% and its cost of equity is 14%. Its marginal tax rate is 30%.

a) Should this project be accepted assuming the company uses the same capital structure to finance it?

b) Holding other things, the same, what perpetual growth rate after year 4 will result in zero NPV for the project?

b) Assume 5% perpetual growth rate after year 4. Assume the company wants to finance this project with 50% debt and 50% equity. In that case both the costs of debt and equity will increase. New cost of debt will be 10%. Will the project be acceptable in this case?

Reference no: EM132968838

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