ABC Company is considering a new investment that will cost $1 million. After-tax cash flows for...

 

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ABC Company is considering a new investment that will cost $1 million. After-tax cash flows for this 5 year project are expected to be $300,000 per year. There is no salvage value. Any investments in working capital are included in the after-tax cash flows given. The firm will raise capital for this project in the same proportion as their current capital structure. Should they accept this project according to NPV? Why? What about according to IRR? Why? Selected data from ABC's Balance Sheet: All Debt: Preferred Stk: Common Stk: Other Info: Total Book Value of Debt: Market Price of Debt: Debt Coupons: Maturity of Debt: Total Book Value of Pref. Stk: Par Value per share: Dividend: Current Market Price per share: 1,200,000 shares outstanding Market Price $35 per share ABC beta is 1.34 Book Value per share is $30. Risk Free Rate: Expected Return on the Market Marginal Tax Rate $50,000,000 92 7%, paying annually 5 years $20,000,000 $50 9% $40 3% 15% 20% ABC Company is considering a new investment that will cost $1 million. After-tax cash flows for this 5 year project are expected to be $300,000 per year. There is no salvage value. Any investments in working capital are included in the after-tax cash flows given. The firm will raise capital for this project in the same proportion as their current capital structure. Should they accept this project according to NPV? Why? What about according to IRR? Why? Selected data from ABC's Balance Sheet: All Debt: Preferred Stk: Common Stk: Other Info: Total Book Value of Debt: Market Price of Debt: Debt Coupons: Maturity of Debt: Total Book Value of Pref. Stk: Par Value per share: Dividend: Current Market Price per share: 1,200,000 shares outstanding Market Price $35 per share ABC beta is 1.34 Book Value per share is $30. Risk Free Rate: Expected Return on the Market Marginal Tax Rate $50,000,000 92 7%, paying annually 5 years $20,000,000 $50 9% $40 3% 15% 20%

Answer rating: 100% (QA)

Yes ABC should accept this project according to NPV The Net Present Value NPV of the project is calc... View the full answer