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0. Welq Co, manufacturers of home furnishings, are considering a new product line that produces decorative garden accessories. Given the complexities around determining the viability of a new product line, they have called you, their trusted financial advisor, to recommend whether to proceed with the project. If Welq goes ahead with the project, they will need to lease a new warehouse facility for $40,000 a year, which is tax deductible the year after the lease payment is made. In addition, Welq will have to renovate the warehouse, at a cost of $60,000, which for tax purposes, they will tax immediately. Machinery to produce the garden accessories will cost $350,000 which includes installation costs of $50,000. This machinery will be depreciated straight line on an annual basis over the entire useful life of 5 years, to a salvage value of zero.

   The project will generate quarterly pretax revenues and pretax expenses of $53,000 and $35,000, respectively. The respective tax implications will also occur at this time. Welq believes they will sell the machine for $13,000 at the end of the useful life.

   In addition, you have been given the following information:

   • The corporate tax rate is 30%;

   • The project is in an industry which is 30% more risky than the industry in

     which the firm currently operates;

   • The firm currently has a beta of 0.8;

   • The market risk premium is 1% every quarter; and,

   • The expected return on the market is 2% every quarter.

1. Assuming that the initial investment is made today and cash flows are received or paid as stated in the question, do you recommend that Welq Co proceed with the project? Why or why not?

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