Reference no: EM133495908

Dany's Potato Pty Ltd operates under classical tax system with a company tax rate of 30%. The company has 16,000 6.2% coupon bond outstanding with $1,000 par value and 25 years to maturity. The bond is currently selling at $1,080. The bonds make half-yearly coupon payment. The company has 535,000 shares outstanding which currently selling at $81 per share. The company also has 20,000 4.2% preference shares outstanding which are currently selling at $92 and the par value of these preference share is $100. The company is riskier than the market as represented by its systematic risk of 1.2. the market risk premium and the risk-free rate are 7% and 3.5% respectively.

Dany's Potato is planning to launch a new product, Ice Potato (they are freeze-dried to last longer) and the it paid $120,000 for a survey to determine the viability of the new product. The company expects the Ice Potato to generate sales of $835,000 per year. The fixed costs associated with the product is estimated to be $204,000 per year, and variable cost will be 20% of sales. The equipment necessary for production of Ice Potato will cost $865,000, which is the only initial cost for the production. The machine will be depreciated to zero over its four years life using straight-line method. Please note that the proposed Ice Potato project is identical to other existing projects of Dany's Potato. Using Net Present Value (NPV) method determine if the company should undertake the Ice Potato project. Compute the IRR of this project and comment if the project should be accepted or rejected based on IRR. You must show all workings involved in solving this problem.