Aerocomp is in the business of computing and computers. They have made decent money in the recent past. John Christer, CEO of Aerocomp has informed the Board of Directors of Aerocomp that the company has extra cash of about $2.5 million. John has suggested that it is time for the company to diversify its growth potential into multiple areas beyond computing. Mark Zuber, the executive assistant to the CEO of Aerocomp, has proposed three alternative investments which are described as under:

Investment: Aerocomp is considering building a pipeline from a remote source of gas with only a 10-year supply of reserves. This qualifies the pipeline for a CCA rate of 20 percent rather than the normal 4 percent. The pipeline will cost $1 million; accompanying buildings will cost another $200,000. The buildings are Class 1 with a CCA rate of 4 percent.

Aerocomp will use land it acquired eight years ago to assemble this project. The land was purchased for $500,000, and it is now worth $2 million. Annual cash flows before amortization from the pipeline and taxes for the 10-year period are estimated at $625,000.

In 10 years the buildings and pipeline will be worthless, but the land will be worth $4.5 million. Environmental clean-up costs at the end of the project are expected to be $1.2 million.

Aerocomp has a tax rate of 30 percent, and its cost of capital is 14 percent. Capital gains are taxed at 50 percent of the gain.

REQUIRED:

Norman Windsor, CMA, CPA, has recently joined Aerocomp as a Senior Financial Analyst. It is Friday morning. John met Norman while he was buying the morning coffee before he starts his work for the day. John tells him about the company plan and shares with him three proposals that the Board is considering. The Board members do not have any experience in financial analysis. Before the Board decides on the projects, John asks Norman to prepare the financial viability of three alternative investments. John asks Norman to do the following:

1. Identify cash inflows and cash outflows for each project, and how these cash flows will be treated in the calculations of financial indicators.
2. Calculate NPV, IRR and Payback period