Trail Holdings $($Trail$),$ a vintner located in the Okanagan Valley, is considering opening a distribution centre in Toronto. The proposed site for the centre is a block of land that Trail purchased two years ago for $$500,000.$ Building the centre is projected to cost $$750,000.$ In addition, Trail will have to spend $$100,000$ on new equipment and make an investment in net working capital of $$250,000.$ In making its capital$-$budgeting decision, Trail has decided to use a five$-$year planning horizon, which coincides with the estimated life of the new equipment.

Both the building and the equipment will be depreciated on a straight$-$line basis to zero salvage value, with the building over $20$ years and the equipment over five years. An independent appraiser has said that the value of the land is currently $$600,000$ and that it should be worth $$800,000$ in five years. The appraiser also believes that the building will be worth $70\%$ of its original cost in five years.

Trail$$s marginal tax rate is $28\%,$ its weighted average cost of capital is $17\%,$ and the applicable CCA rates on the new building and the new equipment are $6\%$ and $20\%,$ respectively. Both assets qualify for the Accelerated Investment Incentive, and therefore $1\mathrm{.}5$ times the CCA can be claimed in the year of acquisition. Assume that on disposal, there are still assets remaining in the classes, and that the UCC balances will still be positive after the deduction of the proceeds.

Distribution is considered less risky than making wine, and the risk$-$adjusted discount rate has been estimated to be $15\%.$

Finally, based on market analysis, Trail has developed the following pro forma income statements for the centre:

Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

Revenues $ $620,000$ $ $750,000$ $ $800,000$ $ $800,000$ $ $850,000$

Cost of goods sold $310,000375,000400,000400,000425,000$

Depreciation $57,500$

Income before $342,500$ taxes Required:

a$)$ Based on the NPV method, should Trail open the new distribution centre?