S & P Corporation (SPC) is considering entering a new line of business. In analyzing the potential business, the financial staff has accumulated the following information:

• The new business will require a capital expenditure of $7 million at t = 0. This expenditure will be used to purchase new equipment.

• This equipment will be depreciated according to MACRS seven-year class (see table on next page).

• The equipment will have a salvage value of $500,000 after seven years.

• The required level of working capital is 2.5% of expected sales over the year:

WCt = 2.5% *Salest+1

• The new business is expected to have an economic life of seven years.

• The Marketing Department forecasts to sell 300,000 units during the first year and then 400,000 units thereafter. The expected price is $10 per unit during the first year. Price must be adjusted by inflation in subsequent years.

• Variable cost is expected to be $6.00 per unit whereas fixed cost is $100,000. These figures must be adjusted by inflation in subsequent years.

• The new product is expected to increase before-tax cash flows of the companys existing products by $300,000 per year in real terms. This amount also has to be adjusted by inflation.

• The expected inflation rate during the life of the project is 2% per year.

• The companys interest expense each year will be $220,000.

• The companys tax rate is 26%.

• The company is very profitable, so any accounting losses on this project can be used to reduce the companys overall tax burden.

• The companys cost of capital (WACC) is 7.44%. However, the proposed project is riskier than the average project for SPC and therefore you have to add 2% to the corporate cost of capital.

The companys CFO wants you to analyze the project and to write a short report with your recommendation. Please be advised that both financial and non-financial managers will read the report; therefore, make sure you explain your calculations and recommendation.

MACRS 7-year class

Year	Depreciation Rates (%)
1	14.3
2	24.5
3	17.5
4	12.5
5	8.9
6	8.9
7	8.9
8	4.5

Also please show all of the excel functions on either a google sheet or Microsoft excel page. Thank You!