Problem:

Essex Chemical Company is considering an expansion into a new product line that is more risky than its existing product mix. The new product line requires an investment, NINV, of $10 million and is expected to generate annual net cash inflows of $2.0 million over a 10-year estimated economic life. Essex Chemical's weighted cost of capital is 12 percent, and the new product line requires an estimated risk-adjusted discount rate of 17 percent, based upon the security market line and betas for comparable companies engaged in the contemplated new line of business.

Required:

Question 1: What is the project's NPV, using the company's weighted cost of capital?

Question 2: What is the project's NPV, using the risk-adjusted discount rate?

Question 3: Should Essex Chemical adopt the project?

Note: Be sure to show how you arrived at your answer.