Provelli Corp. is analyzing a project with an initial cost of $102,000 and cash inflows of $65,000 in year one and $74,000 in year two. This project is an extension of the firm's current operations and thus is as risky as the current firm. The firm uses only debt and common stock to finance its operations and maintains a debt-to-equity ratio of 0.45. The after-tax cost of debt is 4.8 percent, the cost of equity is 12.7 percent, and the tax rate is 35 percent.
a) What is the project’s appropriate cost of capital?
b) What is the project’s NPV? Should the project be accepted or rejected, based on this criterion? Why?
c) What is the project’s IRR? Should the project be accepted or rejected, based on this criterion? Why?