Question

Overnight Capital Ventures (OCV) is looking to invest $5.5 million dollars for high-tech equipment. OCV is planning to house the equipment in an unused warehouse that they currently own. OCV is currently renting that warehouse and receives $385,000 per year, annually that they would lose by letting their tenants leave to use the warehouse for their equipment.

It would take two years, and capital expenditures of $550,000 per year to install and test the high-tech equipment and make it ready for use. At the end of the third year of the project, OCV expects cash flows to be $1952500 per year and for the first seven years, and the cash flows to increase to $2337500 for the next eight years of the project.   OCV expects to sell the machine in year 17 of the project for $330,000. OCV also plans to expense an additional $550,000 at the end of the project to bring back the warehouse suitable for renting again. Working capital requirements related to this project will be $275,000 and obtained from the corporation at the beginning of the project. Cost of capital is 14%.

The following additional information from OCV is available:   

            Corporate Tax Rate                      40%

            CCA Rate                                     20%

REQUIRED:

Based on the net present value approach, should Overnight Capital Ventures invest in the project? (Show all your calculations)

Answer 1