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You have been given the following information on a project:
• It has a five-year lifetime
• The initial investment in the project will be $25 million, and the investment will be depreciated straight line, down to a salvage value of $10 million at the end of the fifth year.
• The revenues are expected to be $20 million next year and to grow 10% a year after that for the remaining four years.
• The cost of goods sold, excluding depreciation, is expected to be 50% of revenues.
• The tax rate is 40%.
1. Estimate the pretax return on capital, by year and on average, for the project.
2. Estimate the after-tax return on capital, by year and on average, for the project.
3. If the firm faced a cost of capital of 12%, should it take this project?