Color Cupcakes wants to expand its business by selling cookies. The following information is used for project evaluation.

The new cookies will generate $1,500,000 in sales each year for the next 10 years. A portion of these new sales, $500,000, will come from existing customers who switch from cupcakes to cookies.
Because of the expansion, operating expenses will increase by $600,000 per year.
The firm spent $200,000 on market research and testing the new recipe.
The firm uses straight-line depreciation. The project has an economic life of 10 years.
Total cost of the plant, property and equipment that will be required for the project is $1,200,000. The book value will depreciate to zero at project completion. The salvage value is estimated to be $100,000.
The firm will increase net operating working capital by $50,000 at the beginning of the project, and it will be liquidated at the end of the project.
The firm’s marginal tax rate is 20%.
The firm’s bonds have a yield of 8%, its cost of equity is 10%, and its capital structure has 45% debt and 55% equity.