Kingston Ltd is going to 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? (6%)