The idol manufacturer Adbul & Cowell, Inc. (ACI) is considering marketing a new type of idol called Sanjayas. If all goes as planned, ACI will sell $250,000 of Sanjayas each year for the next three years. The Sanjaya fad is expected to die out in three years, at which point the project will end. The variable costs each year will be $100,000. To begin the project, ACI will need to purchase a machine called a Seacrester from Jackson Sciences Corp. The Seacrester costs $600,000, and is depreciated on the MACRS 7-year schedule. After the project ends in three years, the machine can be sold for $500,000.

When ACI initially announced the project, Clarkson International filed a lawsuit, which the press called frivolous, charging that ACI Sanjayas were infringing on Clarksons intellectual property. ACI and Clarkson just agreed to a settlement in which ACI will make three annual payments to Clarkson of $35,000 each, with the first payment due today. If this agreement had not been reached, the project would not have been able to go forward, but ACI would not have had to pay the money to Clarkson. Regardless of which path they chose, the firm will have to pay its legal team from the firm of Lopez, Urban and Connick Jr. The outstanding legal bills, now due in one year, total $8,675.

Currently, the common stock of ACI has a covariance with the market of 0.038; the standard deviation of the markets returns is 0.2. The current stock price is$20 per share, and there are 60,000 shares outstanding. The return on the market portfolio is expected to be 14.5%, and the yield on Treasury bills is 4.5%. The firm has $50,420 of short term debt, carrying an interest rate of 6%. This level of short-term debt does not change significantly over the course of the year. They also have 1,000 bonds outstanding, with an 8% coupon and 10 years to maturity. Coupons payments are made quarterly. The bonds are currently selling for $1,149.58, but ACI management is unsure if the yield to maturity is 5%, 6%, or 7%. The tax rate is 33%.

If ACI invests in this project, it will change its net working capital. Initial net working capital requirements will total $5,300. ACI expects net working capital to reach $25,300 at the end of the first year, then decrease to $18,700 at the end of the second year, and fall to $10,200 by the end of the fad.

Should ACI invest in Sanjayas?