Use the following information to answer Questions 1 to 4.

Based on an organic food research study completed a year ago at a cost of $50,000, Vohra-Kam Company is considering whether to construct a new organic food production facility on a plot of land that it already owns. The land has a current market value of $1 million and was acquired at a cost of $400,000.

New machinery must be purchased at a cost of $200,000 and a new building must be erected at a cost of $500,000, both of which are eligible for 20% CCA on the declining balance and both of which would have a zero-salvage value at the end of 10 years from today. The land at the end of 10 years is expected to be sold for $1.2 million.

The new facility is expected to generate operating savings of $500,000 per year at the end of each year for the next 10 years.

The firm is subject to 40% regular tax rate and the capital gains are taxed at half this regular tax rate.

The cost of capital is 15% for the project.

1. What will be the company's initial investment in the project?

a) $1 million

b) $1.5 million

c) $1.7 million

d) $1.58 million

e) None of the above

2. What will be the present value of the CCA-based tax savings resulting from the project?

a) $73,043.48

b) $84,000.02

c) $149,565.22

d) $154,735.35

e) None of the above

3. What will be the present value of the expected operating savings as per the information above?

a) $1,505,630.59

b) 1,529,384.31

c) $1,655,195.81

d) $1,725,281.72

e) None of the above

4. What will be the present value of land's expected sale value at the end of 10 years from today?

a) $296,621.65

b) $217,522.54

c) $275,623.37

d) $257,072.09

e) None of the above

5. What will be the project's NPV?

a) $1,992.267.90

b) $332,267.90

c) $368,278.85

d) $111,206.76

e) None of the above

6. What can you say about the project's IRR, given your answer to Question 38?

a) IRR is less than 15%

b) IRR is greater than 15%

c) IRR is equal to 15%

7. Which of the following is not true?

a) The NPV decision criteria assumes that the investment in a project will grow at the project's cost of capital.

b) The NPV and IRR rankings of projects can be different

c) The PI of a project is not affected by the project's cost of capital.

d) The decision to accept or reject a proposal, based on IRR decision criteria, requires knowing the project's cost of capital.