CO2 Inc. currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The expansion is expected to create before-tax operating income of $150,000 a year for 10 years. Net working capital must be increased by $50,000 at the start of the expansion project. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land eight years ago at a cost of $500,000. At the time of purchase, the company paid $70,000 to level out the land so it would be suitable for future use. Currently, the land is valued at $750,000 and it is expected to double in value 10 years from now(i.e., Salvage of the land is $1,500,000 after taxes) . The company currently has some unused equipment which it currently owns valued at $40,000. This equipment could be used for producing awnings if $10,000 is spent for equipment modifications. Another equipment costing $400,000 will also be required. The two equipment are eligible for capital cost allowances on the declining balance at a rate of 20 percent. At the end of the project the old equipment and the new equipment will be worth $6,000, and $50,000, respectively.

Though the new project will reduce the local unemployment rate by 2%, the company needs permission from the majority (i.e. > 50%) of the local population to start the project as it has some potential, though limited, environment hazards in the long run. The permission is assessed following a survey of local residents. The result of the survey is expected later this afternoon. The total cost of the survey is estimated at $15,000 in real term, and it will be paid a year from now. The firms regular marginal income tax rate is 40 percent. The Consumer Price Index (CPI) is estimated at 1 percent (i.e: expected inflation). Assuming that the cost of capital (discount rate) in nominal term is 8.3 percent, do you recommend the project?