Question: Thornley Machines is considering a 3-year project with an initial cost of $618,000. The project will not directly produce any sales but will reduce operating

Thornley Machines is considering a 3-year project with an initial cost of $618,000. The project will not directly produce any sales but will reduce operating costs by $265,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $60,000. The tax rate is 34%. The project will require $23,000 in extra inventory for spare parts and accessories. It is estimated that the discount rate associated with this project should be the cost of capital of the firm. Thornley Machines has no debt. The firms beta is 1.4. The market risk premium is 5%, the risk free assets is 2%. Should the firm accept the new project? Why or why not?

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