Reference no: EM132497877

Cavendish Corporation had embarked on an exciting new project, but is re-evaluating the project after a rocky start.

• Unfortunately, the contractor working on the original equipment has gone broke and will be unable to complete the assembly of the equipment. To date $200,000 in progress payments have been made and will not be recoverable. These costs have been expensed. However, with in-house expertise the equipment for the project could be completed almost immediately at a further cost of $550,000.

• If the project proceeds, an overhaul of the equipment will be required at the end of year 4 for $175,000. All the equipment could be salvaged for $25,000 when the project is completed at the end of year 9.

• The equipment will be put into use immediately, but will not begin to generate revenue until year 2. During year 1, cash expenses of $225,000 will be incurred. The project will generate yearly revenues of $500,000 for years 2 - 9 inclusive. Cash expenses would be $220,000 per year for years 2 - 9 inclusive.

If they embark on this project, Cavendish Corporation will need to increase its inventory and accounts receivable [working capital] by $35,000, immediately.

CCA Rate: 30%

Tax Rate: 40%

WACC: 10%

Required:

Question 1: Using the NPV approach, determine if Cavendish should proceed with this investment? Show all of your calculations.