A food processing company is considering adopting a new seafood processing system.

QUESTION

A food processing company is
considering adopting a new seafood processing system. The system will cost $750,000 plus $23,000
for shipping and installation. It will
result in an increase of $5,000 in the net working capital at the
beginning. No further change in the net
working capital is expected after the system is put into operation.

The expected economic life of the
unit is five years. It will be
depreciated under the 5-year class of MACRS for the tax purpose. At the end of
five years, the machine will be expected to sell for $80,000 and the
accumulated change in the net working capital will be fully recovered.

After the firm adopts the new
system, its annual revenues will be expected to increase by $80,000 and its
annual operating costs will be expected to decrease by $25,000.

The company’s tax rate is
40%. The 3-month T-bill yield is 5%, the
market return is 15% and the project’s beta is 0.7. Should the company take the project? Why?
(20 points)

ANSWER:

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