Mapleleaf Inc. is considering using a building they currently own for a 7-year data processing project that it is undertaking. The building was purchased for $420,000 and the entire building would be used by the project. The company is currently earning rental income from the building of $35,000 per year (after-tax). If the company proceeds with the data processing project in the existing building, then it will not be able to earn rental income until the end of the project. After seven years, Mapleleaf can earn rental income on the facility at $35,000 per year (after-tax).

For the data processing project, the company will need to purchase and install specialized equipment at a cost of $220,000. This equipment will have $20,000 salvage value at the end of the project.

There is no additional cost of restoring the building to its original state at the end of the life of the project.

If the company does not use the existing building for the data processing project, then it will need to rent another specialized building for entire life of the project. This would cost them $115,000 per year (pre-tax). That separate facility would come fully equipped with all the necessary machinery installed.

Equipment purchases for the project are in Class 10 and have a CCA rate of 30%. The firms tax rate is 30%, and its required rate of return on such investments is 16%. For simplicity, assume all cash flows for a given year occur at the end of the year. The equipment purchase occurs at t = 0.

Required:

1. Calculate the NPV for the first alternative (using the facility for the ongoing project).
2. Which option should Mapleleaf choose? Why?