Testing Corp. is considering an investment in an equipment to produce a new medical testing device. The project will require an initial investment in equipment of $800,000, and will last four years, after which, it is estimated that so much population will be immunized that there will not be enough demand to continue with the product, so the project's life is 4 years. It will generate an annual revenue of $550,000 and will carry annual operating costs of $300,000 The project will also increase Testing's net working capital by $80,000. At the end of the project, the equipment will be sold for $120,000. The tax rate is 28.5% and the CCA rate for depreciation purposes is 30%. Testing Corp. assesses that the risk of the project is higher than its existing operations. Therefore, it has decided to use a discount rate for the project that is 2% higher than the firm's cost of capital. Currently, the cost of common equity is 11%, the cost of preferred equity is 8% and the before-tax cost of debt of the firm is 7%. The capital structure of the firm based on market values indicate that assets are financed by 40% of common equity, 20% of preferred equity, and 40% of debt. Calculate the NPV (round your feet answer to the dollar.no decimus) of the project and recommend whether the company should undertake this project. 12 points Testing Corp. is considering an investment in an equipment to produce a new medical testing device. The project will require an initial investment in equipment of $800,000, and will last four years, after which, it is estimated that so much population will be immunized that there will not be enough demand to continue with the product, so the project's life is 4 years. It will generate an annual revenue of $550,000 and will carry annual operating costs of $300,000 The project will also increase Testing's net working capital by $80,000. At the end of the project, the equipment will be sold for $120,000. The tax rate is 28.5% and the CCA rate for depreciation purposes is 30%. Testing Corp. assesses that the risk of the project is higher than its existing operations. Therefore, it has decided to use a discount rate for the project that is 2% higher than the firm's cost of capital. Currently, the cost of common equity is 11%, the cost of preferred equity is 8% and the before-tax cost of debt of the firm is 7%. The capital structure of the firm based on market values indicate that assets are financed by 40% of common equity, 20% of preferred equity, and 40% of debt. Calculate the NPV (round your feet answer to the dollar.no decimus) of the project and recommend whether the company should undertake this project. 12 points
