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:

• SPC spent $1.0 million in marketing research last year.

• The new business will require a capital expenditure of $7 million. 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 five years.

• If SPC goes ahead with the new business, inventories will rise by $400,000 whereas accounts payable will rise by $100,000 (both at t = 0). As a matter of fact, the required level of working capital is 7.5 percent of expected sales over the year:

WCt = 7.5%*Salest+1

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

• The Marketing Department forecasts to sell 400,000 units per year with an expected price of $10 per unit.

• Variable cost is expected to be $5.00 per unit.

• Fixed cost is expected to increase $100,000 if the project is undertaken.

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

• The companys interest expense each year will be $220,000. Also, the company expects to pay dividends from this project in the amount of $100,000 per year.

• 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 7.10%. 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 evaluate this project and make a recommendation. Should the company execute this project? Explain.

MACRS 7-year class

Depreciation

Year Rates

1 14.3%

2 24.5%

3 17.5%

4 12.3%

5 8.9%

6 8.9%

7. 8.9%

8 4.7%

Please also show the functions on excel! Thank you