Kentucky Hardware Company (KHC) is considering an investment project that requires a new machine for producing special tools. This new machine costs $800,000 and will be depreciated over five years on a straight-line basis toward zero salvage value. KHC paid a consulting company $50,000 last year to help them decide whether there is sufficient demand for the special tools. In addition to the investment on the machine, KHC invests $30,000 in net working capital. KHC also has estimated the performance of the new machine and believes that the new machine will produce $450,000 per year in sales, $200,000 per year in cost of goods sold, and $30,000 per year in administrative expenses. The company pays $45,000 in interest expenses annually and has average tax rate 35%.

In order to get an estimate of cost of capital, KHC collect the following information.

Debt: 10,000 6.4% coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 110.69% of par; the bonds make semiannual payments.

Common stock: 495,000 shares outstanding, selling for $63 per share; the beta is 1.05; KHC's most recent dividend was $2.73 per share, and dividends are expected to grow at an annual rate of 5% indefinitely.

Preferred stock: 35,000 shares outstanding, selling for $72 per share; the preferred stock dividend is $3.5 per share.

Market: 8.8% market risk premium and 0.75% risk-free rate.

What is the net present value for the investment project?

	a.	-$15,033.21
	b.	$69,023.88
	c.	-$25,278.31
	d.	$23,619.42

What is the internal rate of return for the investment project?

	a.	6.54%
	b.	8.43%
	c.	9.21%
	d.	7.32%

What is the profitability index for the project?

	a.	-1.07
	b.	1.07
	c.	-0.98
	d.	0.98

Should HC accept the project?

	a.	No because the profitability index is negative.
	b.	Yes because the payback period is longer than the project life.
	c.	Yes because the net present value is negative.
	d.	No because the internal rate of return is lower than the cost of capital.

What is the maximum price that HC has to pay if the target profitability index is 1.1?

	a.	$915,853.23
	b.	$821,439.50
	c.	$735,777.27
	d.	$740,878.90

What is the minimum annual cash flow that project has to generate in order to accept the project?

	a.	$160,494.69
	b.	$219,597.61
	c.	$145,396.85
	d.	$207,878.86