Let’s modify the Beck Electronics example found on page 230 as follows. First, we assume that all of the project’s $ 6 million cost is funded through the use of excess cash ( i. e., from equity, funded out of retained earnings). We also assume that the market rate of interest earned on the $ 6 million in cash that will be invested in the project equals 12.5%. Note that the after-tax rate of return (given the 20% tax rate) is 10%, which is the cost of equity capital.
a. Evaluate the investment’s impact on Beck’s EPS.
b. What is the project’s NPV?
c. What is the annual economic profit for the project?
d. What do your calculations tell you about the project? Is it one that Beck should pursue? Explain your answer.