Gradient Ltd is evaluating a new project that has the same risk as the overall firm. The cost is estimated at $75,000 and the expected cash flows are:

Year Cash Flow

1 $18,000

2 $25,400

3 $35,000

4 $17,900

Currently the company has 50% debt and 50% equity. The cost of Sparks debt is 9% and T-bills are yielding 5%. The market risk premium is 10% and Spark Ltd has a beta of 1.2. Tax rate is 30%. Should the project be accepted or rejected? Briefly explain why.

question 2

You are considering a new product. It will cost $966,000 to launch, have a 3-year life, and no salvage value. Depreciation is straight-line to zero. The required return is 20%, and the tax rate is 30%. Sales are projected at 80 units per year. Price per unit will be $40,000, variable cost per unit is $24,000 and fixed costs are $500,000 per year. Operating cash flows have been calculated for you as 642,600 per year.

1. Suppose that the sales units, price per unit, variable cost per unit, and fixed cost projections above are accurate to within 15%. What are the new variables for the best case and worst case scenarios?
2. What is the accounting break-even for this project?
3. What is the degree of operating leverage?