Company CCC is evaluating a new product, a vitamin C/fish oil blended energy drink. As an assistant director of the capital budgeting division of AAA Health, you are responsible for the evaluation of the proposed project. You collected the following information about the project and the cost of capital. You should make an accept/reject recommendation to the director of your division based on your evaluation. Information about the Proposed Project Initial investment and depreciation: The new drink would be produced in an unused building (owned by AAA Health), which is fully depreciated. The new equipment required for the project would cost $400,000, plus an additional $50,000 for shipping and installation. With the new project, inventories would rise by $60,000, and accounts payable would increase by $10,000. All of these costs would be incurred at t = 0. The machinery will be depreciated under the Modified Accelerated Cost Recovery System (MACRS) as 3-year property. The depreciation rates are 33% at t = 1, 45% at t = 2, 15% at t = 3, and 7% at t = 4. Project life and salvage value: AAA Health expects to run the project for four years. The cash inflows are assumed to begin one year after the project is undertaken, or at t = 1, and to continue to t = 4. At the end of the projects life (t = 4), the equipment is expected to have a salvage value of $50,000. Also, the firm will recover the net working capital at the end of the project life. Sales and operating costs: Unit sales are expected to total 160,000 bottles per year, and the expected sale price is $2.50 per bottle. Cash operating expenses for the project (total operating costs excluding depreciation) are expected to amount to 40 percent of sales revenue. Tax rate: AAAs marginal tax rate is 25 percent. Information for the Cost of Capital Estimation AAA Health has outstanding bonds with a 4.40% annual coupon rate, 10 years remaining until maturity, and a face value of $1,000. The bonds make semiannual coupon payments and currently are trading in the market at a price of $880.98. A3H can issue preferred stock with an offering price of $25.00 per share, an annual per-share dividend of $2.16. Flotation costs are equal to 4.0% of the gross proceeds. Ten-year Treasury bond yield = 5%; the market risk premium = 5%; the beta of A3H = 1.2. Target weight of capital: 20 percent debt, 10 percent preferred stock, and 70 percent common equity. A3H can undertake a new project without issuing new shares of common stock if the required initial investment does not exceed $600,000. If the initial investment is greater than $600,000, the firm should sell new common stock.

assume no constraint on capital budget

19. IRR a. Calculate the projects IRR.

b. Based on the results of your IRR analysis, should the firm accept the project? Why?

20. MIRR a. Calculate the projects MIRR.

b. Based on the results of your MIRR analysis, should the firm accept the project? Why?