You have just graduated from university and are considering starting a new line clothing.

To start the new line of clothing you require a capital outlay of $$25,000$ and net working capital of $$1,000.$

The new line will sell for $$18\mathrm{.}99$ per unit. Sales in year $1$ are estimated to be $500$ units. You have determined that sales will rise by $20\%$ annually after year $1.$ Direct materials costs are estimated to be $20\%$ of annual sales and direct labour costs $10\%$ of annual sales.

Fixed costs for the new business will be $$2,000$ annually. Your old product line will more than likely experience a drop in sales by $$500$ annually over the first four years of operating the new product line.

You started the business a few years ago, after taking an awesome finance course in university. At that time your company issued $35,000$ common shares which currently trade at $$1\mathrm{.}50$ per share on the web site InvestO$$Rama$.$com. They have a beta $1\mathrm{.}50.$ Pundits are estimating that the InvestO$$Rama$.$com market will rise by $22\%$ over the next year and that riskless investments will earn an average $10\mathrm{.}0\%.$

Your company recently issued $250$ coupon bonds at a price of $120.$ The bond$$s pay a $15\%$ coupon, and have a term to maturity of $3$ years

The company$$s tax rate is $20\%$ and its depreciation rate is $10\%.$ You also note, the new product line is expected to grow at an annual pace of $4\%$ after year $5.$

Question$($s$)$:

$1.$ Would you recommend management accept this new project? Justify your answer using two measures of return in an excel spreadsheet.$(50$ Marks$)$