In: Finance
MHI Corp. is considering a capital budgeting project developing a new and improved home management system that will allow customers to easily inventory frequently purchased items for their home and to receive reminders when these items need to be repurchased. The firm’s WACC is 6.7%. The project is slightly more risky that the average project of the firm. You have been advised to add a 3.1% premium to the firm’s WACC for the discount rate for this project. The project requires an investment of $4 million for new manufacturing equipment. This equipment will be depreciated using 5-year MACRS depreciation. The project will last three (3) years. At the end of three (3) years, the firm believes they will be able to sell this equipment for $1,000,000. The firm expects to sell 2,500 units each year as a selling price of $1,000 per unit. The cost of goods sold is expected to be 35% of revenues. Salaries and marketing expenses related to this project are expected to be $500,000 each year of the project. The project requires an initial investment in net working capital of $300,000. All working capital will be returned to the firm at the end of the project. The marginal tax rate for the firm is 34%. Should this project be accepted? Why or why not?