What is the net present value of the project

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As the CFO of Icecorps, you are calculating the cost of capital for Icecorps' projects. Icecorps has 4,000 bonds outstanding that mature in 20 years. Each bond is traded at $1,100. Each bond pays a semi-annual coupon at a rate of 8% per annum, with the effective pre-tax cost of debt of 7%.

Icecorps has 100,000 ordinary shares outstanding at a price of $50 per share. The firm has just paid $3 dividend per share. Dividends are expected to continue growing at a rate of 4% per year into the indefinite future. The firm's tax rate is 30%.

Icecorps is considering a project that requires an initial investment of $2.5 million. You estimate that the project's free cash flows will be $0.18 million per year in perpetuity. You consider the after-tax weighted average cost of capital as the proper discount rate to evaluate this project.

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

(b) Should the firm accept the project? Explain.

Reference no: EM132806848

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