A firm is thinking about launching a new product. The initial investment in equipment is $800,000. The project has an estimated life of four years. The revenue per year is estimated to be $750,000, and operating costs per year is estimated to be $500,000.

The investment in the net working capital will be $100,000 at the beginning of the project. It is expected that all of this investment in net working capital will be recovered at the end of year 4.

The firms tax rate is 25% and the CCA rate for depreciation purposes is 30%. The equipment will be sold at the end of year 4 for $75,000. It will not be the last asset in the CCA class.

The company feels that the risk of the project is higher than its existing operations. Therefore, it has decided to use a required rate of return (discount rate) for the project that is 3% higher than the firms cost of capital. Currently, the before tax cost of debt of the firm is 8%, its current cost of common equity is 12%, and its current cost of preferred equity is 10%. The capital structure of the firm based on market values indicate that assets are financed by 30% of common equity, 15% of preferred equity, and 55% of debt.

Required: a) Calculate the NPV of the project

b) recommend whether or not the company should undertake this project. and explain your recommendation.