Calculate the Net Present Value of the Windmill venture

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Reference no: EM132759321

Question - Quixotic Enterprises is about to embark on another venture. Poncho Sanchos, 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 $390,000 and will last 11 years, at which time they will have an estimated salvage value of $25,000. However, a capital upgrade of $98,000 will be required at the end of five years. An inventory of spare parts (working capital) amounting to $11,000 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 $4,000 per year.

This enterprise is expected to generate cash from the sale of electricity of $158,000 a year for 11 years. Cash expenses for each of the 11 years will be $11,000.

The company's tax rate is 21 percent, the CCA rate is 9 percent and the cost of capital is 22 percent.

Required -

A. Calculate the Net Present Value of the Windmill venture?

B. It's not worth any marks, but it helps with the marking: what number did you use for (Cpv - Spv)?

C. Should Quixotic dream the impossible dream and invest in the Windmill venture?

Reference no: EM132759321

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