Quixotic Enterprises is about to embark on another venture. Poncho Sancho's, the faithful financial analyst, once again will examine the viability of this venture after 31 failures.

A number of windmills are to be constructed on the southern frontier to generate electricity. They will cost $398,000 and will last 10 years, at which time they will have an estimated salvage value of $20,000. However, a capital upgrade of $92,000 will be required at the end of five years.

An inventory of spare parts (working capital) amounting to $10,000 will be required during the term of the venture and will be housed in a warehouse that is currently not being used, but which has been used for Quixotic's previous ventures. The warehouse could be rented out at $6,000 per year.

This enterprise is expected to generate cash from the sale of electricity of $147,000 a year for 10 years. Cash expenses for each of the 10 years will be $12,000.The company's tax rate is 29 percent, the CCA rate is 8 percent and the cost of capital is 25 percent.

a) Calculate the Net Present Value of the Windmill venture by completing a cash flow spreadsheet.

YEAR 1 2 3 4 5 6 7 8 9 10 Present Value at time 0

Initial Investment

Working Capital

Revenues

Expenses

Opportunity

Cost

Capital Upgrade

Salvage

Working Capital Recovery

CCA Tax Shield

Net Present Value

b) Calculate: CPV - SPV =

c) Should the company make the investment?