You have recently been hired by the Bumgarner Biscuit Company and have been ask to make a recommendation on the purchase of a new oven. The price is $$175,000$ and shipping and installation will add another $\_\_$$$1000\_.$ The machine falls into the MACRS $3-$ year class life. The machine will be sold after $4$ years for $$30,000$ dollars. The machine would require a $$5500$ increase in net operating working capital. Revenues are expected to increase by $$4000,$ but pretax labor costs would decline by $$25,000$ per year. The marginal tax rate is $35\%$ and the WACC is $8\%.$ The firm spent $$5000$ last year investigating the feasibility of using the machine.

The applicable depreciation rates are $33\%,45\%,15\%,$ and $7\%.$

SJB Corp is considering the expansion of their building. The expected cash outlay for this project is $$100,000.$ The new building is expected to generate net cash flows of $$30,000$ in year $1,$ $$40,000$ in year $2$ and $$110,000$ in year $3.$

SJB wants to maintain their current capital structure $($see balance sheet below$).$ Their current outstanding bond yield is $5\%,$ and new bonds can be issued for $4\%.$ Currently, the stock for SJB has a dividend yield of $2\%$ and their expected growth rate is $7\%.$ In the past, SJB stock has averaged $$30\mathrm{.}00$ a share and is considered to be of average risk. SJB is subject to a $32\%$ marginal tax rate. You must $$show your work$($in the spread sheet$)$ to receive full credit.

A$)$ Should SJB Corp pursue this project? Why or why not?

B$)$ If they pursue the project, what would their projected balance sheet look like?

SJB Corp Balance Sheet $($Current$)($B$)$ SJB Projected

Assets Claims on Assets Assets Claims on Assets

Total Debt $ $180,000$

Total Equity $$120,000$

Total Asts $300,000$ Total Claims $$300,000$