What is the value of this project to the firm

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Reference no: EM13938311

A firm is planning to invest in a new project. The initial cost of the project is $1,000,000 and the project is expected to generate a risky annual year-end cash flow of $95,000, forever. The opportunity cost of capital with all-equity financing is 10%. However, the project allows the firm to borrow $400,000 of the initial cost at a cost of debt of 7%. Assuming the firm borrows the $400,000 and uses retained earnings to pay for the other $600,000, what is the value of this project to the firm? Assume a tax rate of 35% and that the debt will be fixed and perpetual. (Hint: do not be confused by the firm using retained earnings; this simply means the project is financed with $400K in debt and $600K in equity).

Reference no: EM13938311

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