Sharp's Current Capital Structure of 60 Percent Equity, 35 Percent

Sharp's current capital structure of 60 percent equity, 35 percent debt, and 5 percent preferred stock is considered optimal.This year Sharp expects to have earnings after tax of $3.6 million and to pay out $600,000 in dividends.Sharp can also raise up to $2 million in long-term debt at a pretax interest rate of 10.6 percent (all debt over $2 million will cost 11.4% pretax) , and sell preferred stock at a cost of 11.5 percent.Sharp's marginal tax rate is 40 percent.The current value of Sharp's common stock is $36 and a dividend of $2.15 is expected to be paid during the coming year.Dividends have been growing at an annual compound rate of 8 percent a year and are expected to continue growing at that rate.New shares can be sold to net the firm $34.50.Sharp has an opportunity to invest in the following capital projects.Which one(s) should be accepted?
Project Cost Annual Cash Flow Project Life
$$\begin{array} { l l l r } 1 & \$ 3.0 \text { million } & \$ 552,893 & 10 \text { years } \\2 & \$ 2.5 \text { million } & \$ 693,481 & 5 \text { years } \\3 & \$ 2.0 \text { million } & \$ 345,220 & 10 \text { years }\end{array}$$

A) 1 and 2 $2.0 million $345,220 10 years
B) 1 and 3
C) 1, 2, and 3
D) cannot be determined from the information provided