View the step-by-step solution to: C&O, Inc. is considering a project that requires an initial cash

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C&O, Inc. is considering a project that requires an initial cash outlay for equipment of $41.4 million. The equipment will be depreciated to a zero book value over the 4-year life of the project. At the end of the project, C&O expects to sell the equipment for $29.9 million. The project will produce cash inflows of $12.6 million a year for the first 2 years and $5.8 million a year for the following 2 years. C&O has a cost of equity of 14 percent and a pre-tax cost of debt of 9 percent. The debt-equity ratio is .60 and the tax rate is 38 percent. The company has decided that it will accept the project if the project's internal rate of return (IRR) exceeds the firm's weighted average cost of capital (WACC) by 1.5 percent or more.
1) What is the IRR of the project and should C&O accept this project? why or why not?
2) What is the NPV of this project at the unadjusted WACC?
3) What is the NPV of this project at the adjusted WACC?
4) Do your answers to #2 and #3 support your answer to number 1? Explain your answer..
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Initial Investment
Life of the project
Salvage vlaue
Cash flows
Cash flows

12.6 first 2 years
5.8 next 2 years

Cost of equity
Pre tax cost of debt
Debt equity ratio

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