Reference no: EM131517171

As the director of a firm's capital budgeting department, you have been asked to evaluate a project. After collecting information from various sources, you have determined the following. The firm's preferred stock pays a constant annual dividend of $2.25 and is currently selling for $20. The firm is expected to pay a common stock dividend of $3 in one year, with anticipated growth of 2% each year thereafter. Currently, the common stock is selling at a price of $23.75. The firm has 8 year bonds outstanding with a coupon rate of 8.75%, paid annually. The bonds are currently selling at par. The firm is currently being financed with $10,000,000 of debt, $20,000,000 of common equity, and $5,000,000 of preferred stock. The project requires the use of equipment valued at $6, 200,000. The equipment currently has a book value of $3,000,000 with two years of straight-line depreciation (to zero) remaining ($1, 500,000 each year). You anticipate that the equipment can be sold in three years for $2, 100,000. Anticipated sales are 1,000,000 units per year based on a sale price of $11 per unit. The cost of producing each unit is $8.50. If the project is accepted, the firm will need to hire an additional manager with an annual salary of $80,000. The product complements another of the firm's products. As a result, you anticipate increased sales of $700,000 per year for that product. Total research (information gathering for project analysis) expenses to date are $26,000. If the project is accepted, the firm will have to forego another project that has a NPV of $584,000. The firm's marginal tax rate is 40%. Should the project be accepted?