SPC is considering entering a new line of business. in analyzing the potential business , the financial staff has accumulated the following: the new business will require a capital expenditure of $3 million at t=0. it will be used to purchase new equipment.

the equipment will be depreciated as follows;

year. rate 1. .20 2. .32 3. .19 4. .12 5. .11 6. .06

the equipment will have no salvage value after 5 years

if SPC goes ahead and with the new business, inventories will rise by $300,000 at t=0 and it's accounts payable will rise by $100,000 at t=0 this increase in net operating working capital will be recovered at t=5

the new business is expected to have an economic life of 5 years. the business is expected to generate sales of $4 million at t=192100, $4 million at t=2 , and $5 million at t=3,4 and 5. each year operating costs excluding depreciation are expected to be 50% of sales.

company's tax rate is 40%

the company's interest expense each year will be $100,000

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

the company's overall WACC is 5.69% however the proposed project is riskier than the average project for SPC and you are asked to add 2% to WACC when calculating NPV.

calculate NPV, IRR and payback period for this project. write a short memo to the chief finance officer recommending or not entering the new business line. explain.