Problem:
XYZ Company is considering a project has a useful life of 7 years and costs $1 million. The project will have cash flows of $250,000 per year for the life of the project. Also, suppose XYZ Company's stock has a beta of 1.25, the return on Treasury bills is 2% and the expected return on the market is 10%. Also, assume that XYZ has bonds that are currently selling for $1,025.50 (par value is $1,000) with a coupon of 6% that is paid annually and a maturity of 15 years. If the tax rate is 35% and XYZ uses a capital structure of 30% debt and 70% equity. Should the firm undertake this project?
Note: Please explain comprehensively and give step by step solution.