Capt. Joe McDougall is considering purchasing a flight simulator for his aviation school.The simulator's purchase price is $90,000, and if purchased, it will require about $10,000 to modify it for the school's particular use.The asset will be depreciated using the straight-line method over an expected life of 4 years, at which time the expected salvage value (and sale price) is $15,000.Capt. McDougall is expecting the new simulator to attract two additional students per year at a net tuition price of $20,000 each (before taxes), and he expects operating costs to increase by $8,000 per year.

Capt. McDougall's school has a target capital structure of 40% debt and 60% common equity.He does not issue bonds, but he does have a line of credit with a local bank at a 6.5% interest rate.For measuring his cost of equity, he uses the CAPM and DCF methods.The school's beta is .75, the risk-free rate is 4%, and the expected return on the market portfolio is 12%.The current stock price is $50, and the school recently issued a dividend of $1.90/share, which is expected to grow annually by 4% for the indefinite future.The school's marginal tax rate is 38%.

Capt. McDougall believes that his cash flows will increase by 10% in a "good" market and will decrease by 10% in a "bad" market.He estimates that there is a 20% probability of a "good" market occurring, a 30% probability of a "bad" market occurring, and a 50% probability of an average market environment.For his aviation school, the cash flows of most projects have a CV under 2.0.If a project shows cash flows with higher risk than that, he then adds 1% to his average WACC before performing the final analysis.

Given this information, Capt. McDougall wants to know whether to accept or reject the project.He asks you to make your recommendation using both NPV and IRR analysis.