A firm is considering investing in a particular project and has asked its capital budgeting section to evaluate that project. After collecting information from various sources, the following information was obtained. The firm's preferred stock pays a constant annual dividend of TSh. 2,250 and is currently selling for TSh.20,000. The firm is expected to pay a common stock dividend of TSh.3,000 in one year, with anticipated growth of 2% each year thereafter. Currently, the common stock is selling at a price of TSh.23,750. The firm has 8 year bonds outstanding with a coupon rate of 8.75%, paid annually. The bonds are currently selling at par. The firm is currently being financed with TSh.10,000,000,000 of debt, TSh.20,000,000,000 of common equity, and TSh.5,000,000,000 of preferred stock. The project requires the use of equipment valued at TSh.6,200,000,000. The equipment currently has a book value of TSh.3,000,000,000 with two years of straight-line depreciation (to zero) remaining (TSh.1,500,000,000 each year). You anticipate that the equipment can be sold in three years for TSh.2,100,000,000. Anticipated sales are 1,000,000 units per year based on a sale price of TSh.11,000 per unit. The cost of producing each unit is TSh.8,500. If the project is accepted, the firm will need to hire an additional manager with an annual salary of TSh.80,000,000. The product complements another of the firm's products. As a result, you anticipate increased sales of TSh.700,000,000 per year for that product. Total research (information gathering for project analysis) expenses to date are TSh.26,000,000. If the project is accepted, the firm will have to forego another project that has a NPV of TSh.584,000,000. The firm's marginal tax rate is 40%.

Required

Should the project be accepted?

Answer rating: 100% (QA)

To determine whether the project should be accepted we need to calculate the net present value NPV o... View the full answer