Your company is considering spending $5.5 million to purchase equipment to build state-of-the-art personal music systems. Your palm size device can store 10,000 hours of music and can sense the mood of the listener and change volume, tempo, and even the type of music by sensing the listener's alpha brain waves. The equipment is depreciated over 8 years, and it costs $180,000 to install. Assume equipment is fully installed within the next year.

Your initial price point is $275 and your projected sales volume is 85,000 units. Fixed costs are $600,000 and each system costs $215 in parts and labor. Subsequent years' projections are shown on the next page.

Your marginal tax rate is 35%. Assume that this is one of many projects for the company.No special tax treatments are required for years of negative earnings.

An initial working capital investment of $500,000 is required.

You will need to upgrade your technology in 5 years when the competition has "leap- frogged" your unit. You will invest an additional $1.25 million in equipment and an additional net working capital of $250,000. The additional investment will be depreciated over the remaining three years of the project.

You can sell all of your equipment for $2,500,000 (salvage value) at the end of year 8.Also, all working capital investments are recouped at the end of year 8 as well.

You have one bond outstanding, one class of common shares, and one class of preferred stock as shown below.Assume the current capital structure will remain unchanged with this project.

Is this project worth doing? The market premium is 6% and the risk-free rate is 3.5%.

What is your decision: DEAL OR NO DEAL?

Different stakeholders may be interested in different numbers, so at a minimum, justify your decision by calculating the payback period, the discounted payback period, the NPV, the IRR, the MIRR.

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