SS

$5$&$P$ Corporation $($SPC$)$ is considering entering a new line of business. In analyzing the potential business, the financial staff has accumulated the following information:

The new business will require a capital expenditure of $$6\mathrm{.}5$ million at $t=0.$ This expenditure will be used to purchase new equipment.

This equipment will be depreciated according to MACRs seven$-$vear class $($vee table on next. page$).$

The equipment will have a salvage value of $$500,000$ after seven years.

$*$The required level of working capital is S$.$ON of expected sales over the year

$W{C}_1=5\mathrm{.}0m$ Sales$-1$

$*$The new business is expected to have an economic ilfe of ieven years.

The Marketing Department forecasts sales of $300,000$ units during the frat vear and then $400,000$ units thereafter. The expected price is $$10$ per unit during the first year. Price must be adjusted by inflation in subsequent years.

The variable cost is expected to be $$5\mathrm{.}00$ per unit whereas the fixed cost is $$100,000.$ These figures must be adjusted by inflation in subsequent years.

The new product is expected to increase before$-$tax cash flows of the company$/$s existing products by $$300,000$ per year in real terms. This amount also has to be adjusted for inflation.

The expected inflation rate during the life of the project is $2\%$ per year.

The company's interest expense each year will be $$220,000.$

The company's tax rate is $26\%.$

The company is very profitable, so any accounting losses on this project can be used to reduce the company's overall tax burden.

The company's cost of capital $($WACC$)$ is $7\mathrm{.}46\%.$ However, the proposed project is riskier than the average project for SPC and therefore you have to add $2\%$ to the corporate cost of capital.

The company's CFO wants you to calculate the proiect's NPV and MIRR and provide a recommendation. You must explain your recommendation.

MACRS $7-$year class

$\backslash$table$[[$Year$,$Depreciation Rates $(\%)],[1,14\mathrm{.}3],[2,24\mathrm{.}5],[3,17\mathrm{.}5],[4,12\mathrm{.}5],[5,8\mathrm{.}9],[6,8\mathrm{.}9],[7,8\mathrm{.}9],[8,4\mathrm{.}5]]$