You have been given the following information on a project:
equity risk premium of 5.5%
tax rate of 40%
It has a five-year lifetime
The initial investment in the project will be 25M and the investment will be depreciated straight line, down to a salvage value of 10M at the end of the 5th year.
The revenues are expected to be $20 next year and grow 10% a year after that for the remaining four years
The COGS, excluding depreciation, is epected to be 50% of revenues
a. Estimate the pretax return on capital, by year and on average, for the project
b. Estimate the after-tax return on capital, by year and on average, for the project
c. If the firm faced a cost of capital of 12%, should it take this project?