PART 1. CAPITAL BUDGETING PROBLEM (30 points)

You are given a capital project that generates the Cash Flows listed below. In order the execute this project, you will have an initial capital outlay of $400,000. The project is seen as have the same riskiness as the firm's ongoing operations.

YEAR CF

1 $ 100,000

2 $ 120,000

3 $ 120,000

4 $ 120,000

5 $ 100,000

Your firm's balance sheet shows $20,000,000 in equity and 15,000,000 in debt. Using SML/CAPM, you estimate the required return on equity is 14% and the pre-tax return of debt is 10%. The firm faces a 21% corporate tax rate.

(a)What is the weighted average cost of capital (WACC) for the firm? Show your work (to two digits)

WACC = ___________________________

(b)Using that WACC, what is the net present value of this project? Using this rule, should the firm fund the project? Show your work.

NPV = ___________________________

(c)What is the Internal Rate of Return for the project? Using this rule, should the firm fund the project? (note: You may use the excel solver, but not the IRR function in Excel) Show your work (attached Excel).

IRR = ___________________________

(d) Your firm also uses the "Payback" Criteria? If the firm's required payback period is 3 years, should you fund the project? Show your work