What is the value of the project

Reference no: EM132025073

Question: OU Tech has $600,000 of debt on its balance sheet and pays corporate taxes at the 40% rate. The CEO of OU Tech faces an investment opportunity that requires an initial investment of $100,000 in new machinery and is expected to generate annual cash flows(before tax) of $85,000 for two years, starting in the first year. At the end of the second year, OU will be able to recover a salvage value of $10,000 by selling the project's machinery. The unlevered cost of capital is 10%

a) What is the value of the project if it will be financed entirely with equity?

b) What is the value of the project if OU Tech decides to issue $80,000 in bonds at an interest rate of 8% to finance the project?

Reference no: EM132025073

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