Watkins Construction and Engineering won a bid with the Growth and Environmental Management Department that will generate $15,000 revenue/per year over the next three years. The project requires the acquisition of a new earth mover. The mover's basic price is $40,000; it would cost another $10,000 to modify it for special use. The equipment falls in the 3-year MACRS class (33%, 45%, 15%, 7%) and will be sold after three years for $20,000. The tax rate is 40%. 

The earth mover will also save the firm $20,000 per year in before-tax costs. The project will also require an upfront investment of $2,000 in NOWC with 100% recovery of it at the end of the project. The market value of Watkins' debt is $200 million and the total market value of equity is $800 million. The risk-free rate, market risk premium, and beta are 2%, 8% and 1.5 respectively. The cost of debt is 5%. 

Should Watkins accept this project? Why?

Answer rating: 100% (QA)

Should accept the project WACC 1180 NPV 1219706 Explanation FCF from the Project Year Revenues Dep E... View the full answer