Based on an organic food research study completed a year ago at a cost of $50,000, Vohra-Kam Company is considering whether to construct a new organic food production facility on a plot of land that it already owns. The land has a current market value of $1 million and was acquired at a cost of $400,000.

New machinery must be purchased at a cost of $200,000 and a new building must be erected at a cost of $500,000, both of which are eligible for 20% CCA on the declining balance and both of which would have a zero-salvage value at the end of 10 years from today. The land at the end of 10 years is expected to be sold for $1.2 million.

The new facility is expected to generate operating savings of $500,000 per year at the end of each year for the next 10 years.

The firm is subject to 40% regular tax rate and the capital gains are taxed at half this regular tax rate.

The cost of capital is 15% for the project.

a) What will be the company's initial investment in the project?

What will be the company's initial investment in the project?

a)	$1 million
b)	$1.5 million
c)	$1.7 million
d)	$1.58 million
e)	None of the above

b) What will be the present value of the CCA-based tax savings resulting from the project?

a)	$73,043.48
b)	$84,000.02
c)	$149,565.22
d)	$154,735.35
e)	None of the above

c) What will be the present value of the expected operating savings as per the information above?

a)	$1,505,630.59
b)	1,529,384.31
c)	$1,655,195.81
d)	$1,725,281.72
e)	None of the above

d) What will be the present value of land's expected sale value at the end of 10 years from today?

a)	$296,621.65
b)	$217,522.54
c)	$275,623.37
d)	$257,072.09
e)	None of the above

e) What will be the project's NPV?

a)	$1,992.267.90
b)	$332,267.90
c)	$368,278.85
d)	$111,206.76
e)	None of the above

f) What can you say about the project's IRR, given your answer to Question e?

)	IRR is less than 15%
b)	IRR is greater than 15%
c)	IRR is equal to 15%

g)

Which of the following is not true?

a)	The NPV decision criteria assumes that the investment in a project will grow at the project's cost of capital.
b)	The NPV and IRR rankings of projects can be different
c)	The PI of a project is not affected by the project's cost of capital.
d)	The decision to accept or reject a proposal, based on IRR decision criteria, requires knowing the project's cost of capital.