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Digit Ltd has a new factory under consideration, which is expected to generate before-tax cash...

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Finance

Digit Ltd has a new factory under consideration, which is expected to generate before-tax cash flows of $2,500,000 forever. Digit Ltd is currently operating at its target debt-to-equity ratio of 0.25. The new factory is expected to cost $10,000,000. The company tax rate is 30%. The company wishes to raise the fund for the new project by a new issue of 20-year bonds with a yield to maturity of 9% p.a. (the flotation costs of the new debt would be 4% of the amount raised) and a new issue of ordinary shares with a required return of 16% p.a. (the flotation costs of the new share issue would be 14% of the amount raised).

Calculate the net present value (NPV) of the new project. Explain if the company should accept this project or not. (Show answer in dollars, correct to 2 decimal places.)

(Hint: follow these steps: first calculate Digits WACC, then calculate average percentage flotation cost of the new fund raising, then calculate true cost of the project and then NPV of the project)

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