Micro Systems Technologies (MST) is considering the expansion of a new networking appliance that will provide the hardware and software to run an entire home from any internet connection. MST has already run a feasibility study at the cost of $200,000 to assess the attractiveness of the new product.

In order to start the project, the company will require the purchase of a $2.5 million machining equipment with an additional $250,000 for delivery and $150,000 installation. The equipment will be depreciated as 20%, 22%, 33%, 10% and 9.52% over the useful life of the asset, and can be sold at the end of 5 years for $150,000. Also, MST will set up its new operation in a building it already own, which can be leased for $8,000 per month payable in arrears.

MST expects the project to have a five-year life. In the first year, the project is forecasted to have sales of 115,000 units per year at a price of $20 per unit; fixed costs of $20,000 per year, and variable cost per unit of $12.25 per unit. Shipping cost is $150 per 100 unit. From year 2 onward, the unit sales are expected to grow at a rate of 5% per year. Variable cost are growing at 3% per year; whereas other costs and prices are growing at the inflation rate, currently estimated at 4% per year.

The company will need working capital each year equal to 8% of next years sales. The companys marginal tax rate is 30%

Relevant information to estimate the discount rate (cost of capital) is as follow:

- MST has 300,000 shares of 8% $100 preferred stock, which currently sells for $60 per share on the stock market.

- The company has 800,000 shares of common stock outstanding at the market price of $43 a share. The common stock has a beta of 1.50. The Treasury-bill rate at all the time of the project is 5% and the return on the market is estimated at 13%.

- The company also has 13,000 bonds outstanding that are selling for $900 each. Bond with similar characteristics are yielding at 6.75%.

- The project is believed to have the same risk as the firms typical project.

Requirements:

a. Calculate the discount rate (WACC) of the project (Note: if you cannot answer this question, assume that the discount rate is 10%)

b. Calculate the net present value (NPV) and the internal rate of return (IRR) of the project

c. Should MST proceed the project and why?