A. Unitron Corp. is considering project Z, which costs $50 million and offers an

Question

A. Unitron Corp. is considering project Z, which costs $50 million and offers an annual after-tax cash flow of $7.5 million in perpetuity. The project is in an industry that has greater market risk than Unitron’s typical projects. Unitron’s company weighted-average cost of capital, based on its typical projects, is 15%. Should Unitron Corp. accept project Z?

Yes, because the NPV of the project is positive.

No, because a zero-NPV project is a waste of resources.

Yes, because a zero-NPV project is marginally acceptable.

No, because the NPV of the project is negative.

Explanation / Answer

Yes, because a zero-NPV project is marginally acceptable.

Reason;

Cash flows in perpetuity is calculated as

=cash flows / cost of project

= $7.5/15%

=$50 million

In the given case , Npv = cash infow- cash outflow

= 50 - 50

=0 , zero Npv project.... it can be accepted as it is marginal. I.e at break even point of no profit no loss.

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