Prime Business . is considering the construction of a new production line that will generate the firm $30,000 revenue/per year over the next three years. The project requires an acquisition of a new tuning machine. The machines basic price is $40,000. The equipment could be depreciated for tax purpose straight-line over 5 years and will be sold after three years for $10,000. Tax rate is 40%. The machine will also save the firm $10,000 per year in before-tax costs. The project will also require an initial investment of $2,000 in NWC. The balance of NWC will stay at the $2,000 level until being 100% recovered at the end of the project.

The firms market value of debt is $400 million. The company has 20 million shares outstanding with a price of $20/share. The cost of debt is 4%. The covariance of the firms stock return with the return of the S&P 500 is 0.1. Given that the expected return of S%P 500 is 10% with a standard deviation of 20%, and the one-year Treasury bill rate is 2%.

Should Prime Business take the project?