A company is considering building a new and improved production facility for one of its existing products. It would be built on a piece of vacant land that the firm owns. This land was acquired four years ago at a cost of $250,000; it has a current market value of $400,000. The building can be erected for $300,000. Machinery (equipment) worth $60,000 needs to be bought. The company will finance the construction of the building and the purchase of the equipment by borrowing $360,000 for 10 years at 5% interest. Interest will be paid annually and the full amount of the loan will be repaid in one payment at the end of the 10 years. The companys net working capital will increase by $50,000 if the new production facility is built. Operating savings from the new production facility are expected to be $150,000 per year for the next 10 years. The total fair market value (salvage value) of the assets at the end of the 10 years is expected to be $500,000 one quarter of which is attributable to the building and equipment. The building and equipment will be amortized on a straight-line basis over 10 years. The firms tax rate is 40 percent and CCA will be taken on all depreciable assets at a rate of 20%. The firms weighted average cost of capital (WACC) is estimated at 10 percent. Should the company build the new and improved production facility?

Calculate the Following:

1. Cost of acquisition

2. Present Value of CCA Tax Shield (IN PERPETUITY) on cost of acquisition (net of disposal) [Use FORMULA if declining-balance CCA] There is no CCA on land.

3. Present Value of INCREMENTAL (annual) After-Tax Net Operating Income

4. Increase in Net Working Capital, if any (INVESTMENT IN NWC) [If additional investment, calculate Present Value]

5. Present Value of Decrease in Net Working Capital (RECOVERY OF NWC)

6. Present Value of Salvage Value (less capital gains tax, if applicable)

7. Present Value of Salvage Value (less capital gains tax, if applicable)

8. Present Value of Lost Tax Shield due to Salvage Value (at LCP) [Use FORMULA if declining-balance CCA]