A proposed arena investment project for KAC-Polo has an equipment cost of $1,100,000. The cost will be depreciated straight-line to a zero salvage value over its 20 year life. The firm will also use their existing, but currently unused, equipment for this project that has been fully depreciated but still has a market value of $437,000. Cash sales will be $1,923,490 per year and variable costs will run $270,469 per year. Fixed cost is $46,100 per year. The firm will also need to invest $260,831 in net working capital. Marketing research for this project was $70,500 last year and on-going marketing ads will cost $9,000 per year. The current capital structure is 40 percent common stock and sixty percent debt, however the capital structure next year will change to 60 percent common stock, 10 percent preferred stock, and 30 percent debt. Preferred stock will be issued at $42 a share with annual dividends of $5. Currently, the coupon rate on the bonds is 6% while the yield to maturity is 7%. The US T-bill rate is 2.7%, the beta for KAC-Polo is 1.7, and the current return to the S&P500 is 15%. The corporate marginal tax rate is 31% while the average tax rate is 26%.
(A) What are the cash flows for the project?
(B) What is the cost of capital for this project?
(C) What is the NPV of this project?
(D) What is the Payback Period?
(E) What is the Profitability Index?
(F) What is the IRR?
(G) Should you accept or reject this project? Assume the payback cutoff is 4 years.