Flotation Costs

A project costs 10 million and has a +NPV 2.5 million. The NPV is computed by discounting at a WACC of 15 % , Unfortunatley the 10 million investment will have to be raised by a stock issue. The issue would incur flotation costs of 1.2 million. Should the project be undertaken as long as it provides us with a positive NPV ?

As long as the project provides a positive NPV, it would increase shareholder value and should be undertaken. A company’s decision however would also depend on its capital rationing and other choice of projects available - Perhaps if there is another project with initial cost of just 9 million and provides 2.4 million, the profitability index for that would be greater.