Peteris theCEO of an agricultureproducts retailer.Heisconsidering the purchaseof a new software system tohelpwithhisnew online retailventure.The software will cost$600,000and willbedepreciated straight-lineoverfiveyears(to zero)..Peter doesnotthinkthe softwarewillbeviableafter4years,however,because thedeveloperwillnolongersupport the product.Evenworse,hethinkshewillneedtopay aprogrammer$20,000 atthe endofyear4 togetridofthesoftwareatthattime.The softwarewillhave severaleffectsifitisinstalled.First,itwillreduceoverhead expensesby $10,000peryearduetosavingsinhardwareneeds. Second,itwillreducelaborexpenses forcustomprogrammingby $100,000peryear.Lastly,duetoitssophisticatedinventory managementsystem,itwillallow Petertoreduceinventoryby $300,000when hebuysthe software.The companyhas atargetdebt/equityratioof 0.2, whichtheyplanto maintainafteradoptingthenew software.Itscurrentequity betais1.2.Peterplansonpaying forthe projectoutofcashraisedfromanewbankloanwithan8%interestrate(its marginalpre-taxcostofdebt).Hehasidentifiedacomparable pure-playcompanyintheonlineretailbusiness,AndrewsInc.,thatisunleveredandhas anequitybetaof1.5. Assumethattherisk-freerateis 5%,themarketriskpremiumis 6%,andallfirmsfacea marginaltaxrateof30%.

1. Whatarethe cashflows fortheproject foreachyear?

1. Whatdiscountrate shouldthefirmuse fortheproject?

1. ShouldPeteracceptthe project? Whyorwhynot?