Longhorn, Inc., has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 50 percent and the tax rate is 21 percent. The required return on the firm’s levered equity is 14 percent. The company is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows:

The company has arranged a debt issue of $8.7 million to partially finance the expansion.

Under the loan, the company would pay interest of 7 percent at the end of each year on the outstanding balance at the beginning of the year. The company also would make year-end principal payments of $2.9 million per year, completely retiring the issue by the end of the third year. Using the adjusted present value method, should the company proceed with the expansion?

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Year 0123 Cash Flow -$14,800,000 5,500,000 9,000,000 8,700,000