Pizza Express Enterprises has a target capital structure of 50% debt and 50% ordinary equity. The firm is considering a new independent project which has an IRR of 13% and which is not related to pizza or pasta. However, a proxy firm has been identified that is exclusively engaged in the new line of business. The proxy firm has a beta of 1.38. Both firms have a marginal tax rate of 40%, and Pizza Express's before-tax cost of debt is 12.0%. The risk-free rate is 10% and the market risk premium is 5%.
REQUIRED:
Should the firm accept or reject the proposed project? Why?