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A firm is considering a $5,000 project that will generate an annual cash flow of $1,000 for the next 8 years. The firm has the following financial data:

* Debt/equity ratio is 50%.
* Cost of equity capital is 15%.
* Cost of new debt is 9%.
* Tax rate is 33%.

Determine the project's net present value (NPV) and whether or not to accept it.
NPV Accept / Reject

A)

-$33 Reject
B)

+$33 Accept
C)

+$4,968 Accept

Click for Answer and Explanation

First, calculate the weights for debt and equity

d + we = 1

d = 0.50We

e + We = 1

d = 0.333, we = 0.667