Investment opportunity to produce new product

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Reference no: EM13922107

The Adjusted Present Value (APV) Company has an investment opportunity to produce a new product that will require an investment in equipment of $24 million with a 4 year life and a salvage value of $5 million and will be depreciated straight-line to zero. The project will generate $60 million in revenue and entail $52 million in operating costs. The Company pays 34% in taxes. The firm is considering a change in capital structure so that it would maintain a debt ratio of 50% and pay 6% in interest on this debt. The firm’s beta is 1.5 and the market risk premium is 8.5% and the U.S. Treasury has a yield to maturity of 4%. You have been asked to determine whether the Company should accept this project and whether it should borrow money to do so. You also have a very skeptical boss who believes that the only way to value a project is to use the flow to equity approach.

Reference no: EM13922107

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