Problem I (24 points) After spending $500,000 to study the potential market for a new specialty chemical, Nelson Industries is considering a new plant requiring an initial investment in new construction and equipment The firm will use land to build this plant that was purchased at a cost of $500,000 five years ago. The land now has a market value of $400,000. The company will purchase $8,000,000 in new plant and equipment. The IRS will allow Nelson to depreciate the plant and equipment to a salvage value of zero on straight-line basis over an eight-year useful life. At the end of five years they expect to be able to sell the land, plant and equipment for $1,500,000 The firm estimates revenue as follows: Year 1 Year 2 Year 3 Year 4 Year 5 S26M S26M S26M $26M $26 M Variable costs (ie. COGS) will be 60% of revenue. Interest expense related to borrowing for the project is $500,000 per year. Fixed costs for the project are estimated to be $3,000,000 annually (this amount includes $1,000,000 of allocated overhead for costs associated with the project). Start-up net working capital requirements for the project are expected to be $800,000. In addition, the company will reduce required working capital $100,000 each year due to increased efficiencies. At the end of the five-year project the net working capital will no longer be required. The company estimates revenue will be cannibalized as follows: Year! Year 2 Year 3 Year 4 Year 5 SIM SIM SIM SIM SIM Required: a) The required return for Nelson is 15%, their average tax rate is 35% and their marginal tax rate is 30%. What is the net present value of the proposed project? b) Would you accept/reject this project