Reference no: EM132490157

Point 1: A firm is thinking about launching a new product. The initial investment in equipment and other set-up is $600,000. The project has an estimated life of five years. The revenue per year is estimated to be $400,000, and operating costs per year is estimated to be $200,000. The project will take place on a land that the firm owns. The company spent $100,000 to renovate the land three years ago. If this project does not take place, the company plans to rent this land for five years, and will earn $50,000 per year from the rent (the company will receive the rent at the end of each year with the first rent at the end of year 1).

Point 2: The investment in the net working capital will be $40,000 at the beginning of the project, but 40% of this will be recovered at the end of year 4, and the rest at the end of year 5. The tax rate is 30% and the CCA rate for depreciation purposes is 20%. The equipment can be sold at the end of the project for $60,000. There is an on-going feasibility study regarding the project. The feasibility study is done by Tim Consulting Group. They have been paid $50,000 a year ago, and they will be paid another $50,000 today. The cost of capital is 10%.

Question 1: How would use a financial analysis to decide if the company should undertake this project?