You are working as an intern at RiseStar Ltd. and you are assigned to value a project producing a new smart phone that will potentially transform the whole smart phone industry. This smart phone project requires the initial investment of $31 million. The Chief Financial Officer (CFO) of RiseStar has already determined that the projects free cash flows will be $4.1 million per year in perpetuity. The CFO has advised two possibilities for raising the initial investment: issuing 20-year bonds or issuing common stock. The companys optimal debt-equity ratio is 0.40. RiseStars current bonds will mature in 10 years, with a coupon rate of 7.30% and semi-annual interest payments. Each bond is currently selling at the face value of $1,000. The company is in the 35 percent tax bracket.

There is another company, NoDebt Ltd, that is identical to RiseStar, except that NoDebt is a 100% equity company. Nodebt pays a regular dividend $2 and expects the dividend to grow at a constant rate of 7 percent per annum. Nodebt paid a dividend of $2.00 per share last week. NoDebts current share price is $12.

a. What is the Net Present Value (NPV) of the smart phone project? Explain.

b. Should the firm accept the project? Explain