A proposed investment has an initial equipment cost of $250. It will have a life of 4 years. The equipment will be depreciated straight-line to zero and be worth $50 after 4 years (i.e., before-tax salvage value is $50). Cash sales will be $230 per year and cash costs will be $120 per year. The firm will also need to invest $70 in net working capital at year 0 and it will be fully recovered after the life of the project. The firm has no debt and its beta is 1.20. The market risk premium is measured at 5%, the risk-free interest rate is known to be 3%, and the corporate tax rate is 20%. The risk level of the proposed investment is known to be same as that of the firm’s existing assets. Should the investment be undertaken?
A proposed investment has an initial equipment cost of $250. It will have a life of 4 years. The equipment will be
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