Michael Scott Paper Co. is evaluating a new project to produce toilet paper. The initial investment in PP&E is $31 million. Within the U.S., it is expected that 70 million cases of toilet paper will be sold by the end of the next year. Executives at Michael Scott believe they can capture 0.5% of this market. Unit sales will increase by 2% each year. In the first year, a case will sell to retailers for $40. After the first year, the unit sale price will increase by 1% each year. The variable cost to produce a case of toilet paper is 50% of the sale price. Fixed costs will be $1 million in the first year and will increase by 1% each year. Net working capital needs will be 35% of the revenue generated in the following year. (Note that all investments in net working capital will be recovered at the end of the project.)

The investment in PP&E will be depreciated on a straight-line basis over the project's economic life, which is 10 years. There is no residual value, and the firm has no plans to sell the equipment at the end of the project.

The firm is financed with 40% debt and 60% equity. The table below shows the firm's bonds outstanding. All coupons are paid semi-annually. The firm's stock has a beta of 1.8. The current YTM on the 10-year government bond is 0%. The expected annual inflation rate is 2.5%. Assume the return on the market portfolio is 9.2%. The corporate tax rate is 25%.

Issue # of bonds Bond price ($) TTM (years) Coupon rate

A 10000 938.64 7 6.0%

B 5000 828.64 8 5.0%

C 5000 406.52 10 0%

Assume the project is has the same risk as the firm. Calculate the firm's WACC and NPV. Should the project be accepted?

What is WACC?

What is NPV?

should the project be rejected or accepted?