A shoe manufacturing firm wants to consider a new project where it wants to recycle plastic waste into durable shoes for men and women. At this point, the project details are as follows:

R &D costs undertaken last year: $ 2 MM (MM = million)

Initial investment capital investment required:

$ 6 million (for machinery). This investment could be depreciated straight line for tax purposes over 4 years. At the end of the project, the firm expects to sell this machinery for $ 1 MM.

First year sales are expected to be $ 15 million; and this is expected to grow at 11% per year over the life of the project.

Other costs (excluding depreciation) is expected to be 65 % of revenues.

Year 0 working capital requirements are 15% of sales in year 1 and thereafter, will keep up with sales at this rate through the life of the project.

Corporate tax rates are 40%.

The firm has an optimal capital structure of 60% debt and 40% common equity. Its semi-annual bonds currently sell for 90% of par, have 6 years to maturity remaining, and offer 8% coupon. The common stock of the firm have a beta of 1.2, risk free rate = 5% and market risk premium is 9%.

Should the project be accepted?

What criteria are you using to decide on whether to accept or reject the project?