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A company is about to undertake a new project. In a Modigliani and Miller world...

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Finance

  1. A company is about to undertake a new project. In a Modigliani and Miller world with only tax, the cash flows are given as following.

1. year

2. year

3. year

4. year

5. year

10

10

10

10

10

Risk free rate =3%, cost of debt = 6% and return on equity =15%. The CEO calculated NPV as 0. Thus, he is indifferent in terms of undertaking the project and does not know what to do. When you checked the CEOs calculations, you realized that the company debt (D/V ratio) increased in financing this new project and the CEO use the old return on equity.

Evaluate the decision of the CEO on the project and help him to decide what to do!

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