Management Question

• Calculate the NPV of a project given the following – and should the company accept or reject the project:It is estimated that the project will deliver $25,000 operating profit each year for 12 years. The firm can borrow as much as they like from their bank (which is being bailed out by the Federal Government – bless ’em) at 10%.They have no retained earnings available – they are paying all their net profit out in dividends at $2.00 per share (I never said this was a well run company)They can sell stock at $20.00 with a flotation cost of $4.00 per share. The stock’s earnings/dividends are growing at 6%They are in a 40% marginal tax bracket.The Board of Directors has determined a target capital structure of 60% debt and 40% common equity. – they have no preferred stock.The machine they are considering costs $160,000.

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