Entrata AS has a market-weighted target equity ratio ( "Target debt Proportion") of 40% and debt has a coupon of 3.4% per year (annual interest payment). Corporate cost of capital without debt ( "unlevered") is 7%. The company pays 25% corporation tax (disregard investor tax and creditor taxes). Entrata planning a new and independent project within their section. The project is planned financed with 30% equity. The remaining will be financed with a term loan over the projects maturity, and at the same rate that the company pays on existing debt (3.4%). The project investment is expected to be 20 million. Expected annual cash flows, including depreciation the tax shield, over the next four years is 5, 6, 6, 6. All figures in millions.
The cash flow is year 1: 5 million, year2: 6 million, year 3: 6 million, year 4: 6 million
Question 1: Is the project without interest tax gain profitable (show your calculations)?