Leland Industries is a producer of bakery and snack goods in Western Canada and are considering expanding into Eastern Canada. The expansion is estimated to cost $10,000,000 for a new production facility. This project is in the same line of business as the firms current operations and is therefore not expected to alter the risk of the firm. The most recent balance sheet is provided below.

Assets

Cash $425,000

A/R $400,000

Inventories $500,000

Total Current Assets 1,325,000

Net Fixed Assets 18,000,000

Total Assets 19,325,000

Liabilities

A/P $300,000

Other current liabilities $425,000

Total Current Liabilities $725,000

LT Debt* 6,500,000

Preferred Stock** 2,500,000

Common Stock*** 3,000,000

Retained Earnings 6,600,000

Total Liabilities & Owners Eq. 19,325,000

Notes to financial statements:

* The 5% semi-annual coupon bonds have a face value of $1,000, were issued 5 years ago and have 10 years to maturity. The bonds are currently selling for a quoted price of 92.56.

** The preferred shares have a $100 par value and 3.5% dividend and are currently selling for $43.75 per share.

*** There are 500,000 common shares outstanding that are currently selling for $24.06 per share.

The CFO has gathered the information below to determine whether the project should be accepted.

• Government Treasury bills are currently yielding 3%, the market standard deviation is 15% and has a return of 10%.
• Leland shares have a covariance with the market of 450 (or 0.0045 if using decimals)
• The marginal tax rate is 35%
• The firm has enough internal funds to finance the equity portion of this project.
• Floatation costs are expected to be as follows: new debt = 5%, new preferred shares = 6% and new common shares = 7%
• The most recent dividend paid was $1.75. Dividends are expected to grow at a constant rate of 8%, forever.
• Assume flotation costs are expensed at time = 0.
• The expansion project is expected to produce annual cash flows before tax of $2,100,000 per year for the next fifteen years.
• The assets associated with the expansion will have no value in 15 years time.
• The present value of the CCA tax shield associated with the new project is $575,000.

Based on a NPV analysis, should Leland expand into Eastern Canada? Show all of your work, including any formulas. Do not use excel.