Problem:
Retniw Inc. is evaluating a new project that will cost $30 million. This project will result in estimated before-tax cost savings of $6 million at the enf of the first year, and these savings are expected to grow at a rate of 2% per year indefinitely. The first would like to keep its debt-equty ratio at 0.8. Its cost of equity is 18% and its before-tax cost of debt is 10%. Retniw's marginal tax rate is 40%.
Required:
Question 1: What are the target weights on debt and equity for Retniw Inc?
Question 2: What is the weighted cost of capital for Retniw Inc.
Question 3: Using the weighted cost of capital for Retniw Inc., calculate the Net present value of this project.
Question 4: Should Retniw Inc invest in this new project ? why or why not?
Note: Provide support for rationale.