Maine Corp. is considering the purchase of a major piece of equipment for its Edmonton manufacturing plant. The project would cost $20m in initial investment and would result in cost savings, before tax, of $3.25m per year for five years. The equipment could be sold for $4.5m at the end of the five years. The equipment would also result in an increase in NWC of $140,000, which will be recovered at the end of the project. The companys CCA rate is 22% and the corporate tax rate is 40%. a) If Maines WACC is 7%, should the company proceed with the project? b) Maine Inc. purchased an area of land last year for $2.5m. At that time the company spent $75,000 in legal fees, and $200,000 to have the site graded. The company borrowed to buy the land and now has interest costs of $20,000 a year. The company now has the choice of building one large factory on the site, or a strip mall containing several smaller stores. What costs identified above should be included in the capital budgeting analysis?

The answers are: a. Maines NPV = -$3.931, reject b. The only cost to be included is the opportunity cost of building either strip mall or factory.

How did they get these numbers?