Westcon is considering building a facility to tap thermal energy using wind power. Part of the project's
Question:
Westcon is considering building a facility to tap thermal energy using wind power. Part of the project\'s cost, $750,000, can be financed with a loan from the Federal Energy
Commission at the below-market rate of 5 percent. The remainder, $250,000, can be financed with an industrial revenue bond at 10 percent. No debt is being displaced. Current debt rates
for Westcon are 15 percent. The project should generate before tax cash flows of $1,500,000 per year for ten years. Westcon has a 40 percent tax rate, and the D/E ratio is .50. Westcon estimates that the project beta is 1.50 and forecasts a risk-free rate of 10 percent for the life of
the project. The return on the market is estimated to be 20 percent.
a. Should Westcon undertake the project?
b. Assuming the project is of the same risk as Westcon itself, would the project be acceptable without the subsidies? Explain.
Managerial Economics and Business Strategy
ISBN: 978-0073523224
8th edition
Authors: Michael Baye, Jeff Prince