ABC Corporation is considering investing in a project which requires buying a new asset that will cost $100,000 with a useful life of 3 years. ABC is working in a highly competitive market. The expected EBIT from the project are $30,000 in year 1, $50,000 in year 2, and $40,000 in year 3. The company's average tax rate is 35%; however, its marginal tax rate is 40%. Its cost of capital based on present conditions in the financial markets is 12%. The asset used for this project is entitled to a 20% CCA rate, and the asset has a salvage value equal to its book value. NWC requirement is 20% of the project operating income per year, with investment in NWC made at the beginning of each year. ABC has 1,000 outstanding shares. The project will be financed by 60% debt and 40% equity. Cost of debt is 8%. a. Would you advise ABC to accept the project?

Answer rating: 100% (QA)

To determine whether ABC Corporation should accept the project lets calculate the projects Net Prese... View the full answer