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You are considering a capital budgeting proposal glow-in-in-the-dark pacifiers for anxious first time parents, You estimate that the equipment to make the pacifiers would cost
You are considering a capital budgeting proposal glow-in-in-the-dark pacifiers for anxious first time parents, You estimate that the equipment to make the pacifiers would cost you $50,000 (which you can depreciate as a 5-year property (MACKS) for tax purposes) and that you can sell 15,000 units a year at $2 a unit. The cost of making each pacifier would be $0,80. and the tax rate you would face would he 40% You also estimate that you will need to maintain an inventory at 25% of annual revenues for the period of the project and that you can salvage 80% of this working capital al the termination of the project. Also assume that the initial working capital investment will occur at the initiation of the project. Finally, you will be setting up the equipment in your garage, which means you will have to pay $2,000 a year to have your car garaged at a nearby private facility. (Assume that you can deduct this cost for tax purposes). To estimate the discount rate for this project, you find that comparable fims are being traded on the financial markets with the following betas: Company Debt-Equity Ratio Tai Kale Beta Nuk - Nuk 0.50 0 40 1.3 Gerber 1.00 0.50 1.5 You expected to finance this project entirely with equity, the current Treasury Bond rate is 11. 5% and the return on the most commonly used market index is 6% What is the appropriate discount rate to use for this project Should the project be accepted Explain your decision
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