is going to evaluate if it should invest in a new project that produces smartphones. The project requires a new machine and it will cost $200,000. The machine will last for five years and it will be fully depreciated to zero over the project's five-year life. However, the manager can still sell the machine by the end of year five for $50,000 before tax. Price per unit of smartphone is expected to be $18 per set for the all five years and unit sales are 6,000 per year for the five years. In order to produce the smartphones, variable costs constitute 35% of total sales and the manager also needs to spend $8,000 in fixed cost every year. In order to make sure that the business is functioning smoothly, manager needs to make initial investment $60,000 in net working capital, which could be recovered after the project ends in year five. This project is all-equity financed and its stock has a beta of 1.15. Risk-free rate is 3.8% and market premium is 7.5%. Tax Rate is 16%.

a. What is the cost of equity for Kingston Ltd?

b. What is the NPV of this project? Should the firm invest in this smartphone project?

c. If the firm has been given an option to buy a more powerful machine with an extra $20,000 (this extra cost is also depreciable) in year 0 and this machine can reduce the fixed cost to $5,000 every year. Should it buy the more powerful version?

d. What is the highest price the firm is willing to pay for the more powerful machine?

e. In the capital budgeting, we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it not be valid?