Should we proceed with this project?

Initial Investment = $5,000,000

Taxes = 35%

Beta = 1.27

T note = 2.4%

Dividends paid = $1,000,000 with a payout ratio of 33%

Estimated sales are: $2,500,000 for year 1, $4,000,000 for year 2, $7,000,000 for year 3, $6,000,000 for years 4 & 5, $4,000,000 for year 6, and $1,500,000 with a sale of the asset in year 7 for $250,000.

Variables costs are 52%

Fixed costs = $400,000 per year

The companys benchmark is the Wilshire 5000, which is expected to return 11% next year.

250,000 shares of common stock quoted today at $25, paying a dividend of $1.20 per share.

100,000 shares of preferred stock quoted today at $45, paying a dividend of $2.50 per share.

The company is paying on 20-year 4.75% loan issued 5 years ago with todays principal =$2,750,000

Two bonds are outstanding:

1) 20-year bond issued 5 years ago with a coupon rate of 4.25% with todays market rate = 3.75%, there are 2,000 bonds.

2) 15-year bond issued 3 years ago with a coupon rate of 3.88% with todays market rate = 3.6%, there are 2,500 bonds.

Companies estimate its return on equity is 12%.