Assume you have a project with the following Free Cash Flows to Equity:
a. Year 0 = -$100,000
b. Year 1 = $12,500
c. Year 2 = $24,000
d. Year 3 = $27,500
e. Year 4 = $30,000
f. Year 5 = $32,000
g. Estimated Sale value at end of year 5 = $150,000
Now assume that you are working with an individual investor who is interested in making an equity investment in your project. She knows that you are financing the project 50% with debt and so only need $50,000 of equity. She is offering you $25,000 in return for a 50% equity stake in the company. Demonstrate how you would go about estimating the implied cost of equity from this offer?
What factors would you take into consideration in deciding whether or not to accept this offer?