Rahim Corp is evaluating alternative uses for a $4-$storey manufacturing and warehousing building that it purchased $2$ months ago for $$975,000.$

Alternative One: Rent the building to its current occupants for $$75,000$ per year. These tenants are prepared to sign a $15-$year lease.

Alternative Two: Rahim Corp would make leasehold improvements to the existing structure and use the structure for manufacturing a new product line which looks very promising. Rahim$$s engineers and accountants have provided the following information:

$$ Initial cash outlays for building modifications: $$102,000.$

$$ Initial cash outlays for manufacturing equipment & installation: $$382,000.$

$$ Salvage value of manufacturing equipment: $$25,000.$

$$ Annual pre$-$tax cash revenues $($generated for $15$ years$)$: $$390,000.$

$$ Annual pre$-$tax cash expenditures $($generated for $15$ years$)$: $$174,700.$

$$ Initial working capital requirements: $$75,000.$

$$ Working capital released at the end of year $15$: $$75,000.$

$$ Tax considerations.

a$)$ The original building shell $($purchased for $$975,000)$ is CCA class $1$ and has a $10\%$ CCA rate.

b$)$ Building modifications fall into CCA class $1$ and have a $10\%$ CCA rate.

c$)$ The manufacturing equipment is CCA class $14$ and has a CCA rate of $30\%.$

Salvage value of the Building & Restoration costs: At the end of year $15$ it is estimated that the building could be sold for $$1\mathrm{.}5$ million if the building is restored to its original state. Restoration costs for each alternative will be:

$$ Alternative One $($if rent the building$)$: $$20,000.$

$$ Alternative Two $($manufacture new product line$)$: $$100,000.$

Relevant information:

$$ Weighted average cost of capital: $16\%$

$$ Tax rate: $36\%$

$$ Assume all cash flows take place at the end of the year, except for the initial cash outlays which will occur at t $=0.$

QUESTIONS:

a$)$ Which of the two alternative uses of the building would you recommend $($show all calculations$)?$