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.

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)
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