Excelsior Pulp and Paper Limited (EPP) wants to expand its operations. It is considering the purchase of mulching and pressing machine for its new line of paper worth $520,000. The company estimates that the equipment will enable them to increase revenues by $525,000 per year for the next (5) five years, which is the useful life of the equipment. Variable expenses related to the pressing machine are estimated to be $250,000 per year and fixed expenses associated with the project are projected to be $25,000 per year.

The new machine is much bigger in size. EPP intends to install the new machine in an existing facility that the company is leasing out for $20,000 per year. It means EPP will start losing that leasing revenue ($20,000 per year for 5 years) once the project starts.

At the end of its useful life, management believes the mulching and pressing machine can be sold (salvage value) for $20,000. EPP will require $17,500 of net working capital for this project which will be recovered at the end of the project.

The company uses a discount rate of 10% for projects of similar risk, and their marginal tax rate is 30%. The mulching and pressing equipment has a capital cost allowance (CCA) or depreciation rate of 20% (straight-line depreciation).

Use the net present value (NPV) method to evaluate the project. Should the company accept or reject the project? You must show your work for full marks. (10 marks)