Power Construction Limited (PCL) is a construction company with an impeccable record of performance in Puerto Rico. You have been asked by the company to analyze the following project using an NPV analysis. As part of your assignment, you have been informed by the Director of Finance for PCL that the appropriate discount rate for a project of this risk is 14%. Your analysis of PCL ́s tax returns indicates that PCL ́s average income tax rate is 35%.

PCL is currently considering a project in which they would extensively renovate Ashford Hospital over a five-year period. The project would be worth $80,000,000 in revenues that would be received over the five-year life of the project. The contract would provide for revenues of $10,000,000 per year in each of the first two years of the project and revenues equally divided over each of the remaining years of the project. PCL estimates that is expenses associated with the project would be $3,000,000 in the first year of the project but that these expenses would decline at 1% per year for the remainder of the project. For purposes of any analysis assume that these cash flows and the associated tax consequences occur at the end of each year.

For this project PCL would have to invest extensively in some special new equipment. The expected investment would be $12,000,000. This equipment would be part of an extensive array of PCL equipment and would be placed in a CCA class with a CCA rate of 30%. PCL has many assets in this class and the current UCC of this class is currently $325,621,086. At the end of the project PCL expects to be able to dispose of this special equipment to a competitor in the construction field for $4,000,000.

One of PCL ́s major concerns is that if they accept the Health Sciences project they will be obliged to forego an alternate contract with the province of Manitoba, inasmuch as they wouldn ́t have the capacity to undertake both major contracts. This contract would have netted them $4,000,000 per year in net income (before taxes) over the next 3 years. Assume that these cash flows and any tax consequences occur at the end of each year.

PCL also believes that the additional working capital required as a result of undertaking the project will be as follows:

Year 0 $1,000,000

Year 1 $2,500,000

Year 2 $3,000,000

Year 3 $2,000,000

Year 4 $4,500,000

Year 5 $0

Another of PCL ́s major concerns is that if they reject the potential contract with the province of Manitoba, it will impugn their reputation as a reputable and quality contractor and that

they will lose business as a result. They estimate that the potential losses will be $3,000,000 per year for each of the next 6 years. (Assume that these losses and any related tax consequences will occur at the end of each year.) After that time (and because of the expected success of the Health Sciences Project) PCL expects that business will return to pre-project levels.

Perform and NPV analysis to determine if PCL should accept or reject the Health Sciences Renovation project.