Rinkydink Roller Rinks Ltd. is considering acquiring a vacant lot adjacent to one of its centres. The lot would be used for parking during special events at the nearby Sports and Convention Centre and for other short-term projects. The primary purpose would be to hold the land as an investment. It is projected that in seven years the land will be worth $900,000---a large gain from its present price of $375,000. Purchase of the vacant lot would require an immediate investment of $65,000 in working capital, but this would help generate an estimated $60,000 a year in cash flow before amortization and taxes.
Rinkydink Roller Rinks has a corporate tax rate of 25 percent, and its cost of capital is at 20 percent. Taxable capital gains are 75 percent of the capital gain and would be payable one year after the sale of the land. Should Rinkydink Roller Rinks Ltd. acquire the vacant lot?