InTech, a computer software firm that has never paid dividends before, is considering whether it should start doing so. This firm has a cost of equity of 22% and a cost of debt of 10% (the tax rate is 40%). The firm has $100 million in debt outstanding and 50 million shares outstanding, selling for $10 per share. The firm cur- rently has net income of $90 million and depreciation charges of $10 million. It also has the following projects available: The firm plans to finances its future capital investment needs using a 20% debt to capital ratio. a. Which of these projects should the firm accept? b. How much (if any) should the firm pay out as dividends?

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Project Initial Annual Investment EBIT Salvage Lifetime Depreciation ($) ($) (year) 10 million 1 million 5 million 5 2.5 million 40 million 5 million 1 million 10 10 million 50 million 5 million 1 million 10 million 1 2 3 10