Reference no: EM132990051

Question - CapitalBuilders Limited is considering alternative uses for a building they have purchased recently for $800,000. CapitalBuilders could continue to rent the building to the present tenants for at least another 25 years at $50,000 per year. Alternatively they can modify the building to manufacture one of the following two products. The revenue and cost data for two product alternatives follow. Product AC Product XZ Initial cash outlay for building modifications $150,000 $200,000 Initial cash outlay for equipment 500,000 650,000 Annual pretax cash revenue (generated for 25 years) 350,000 420,000 Annual pretax cash expenditure (generated for 25 years) 180,000 220,000 The building will be used for only 25 years for either product AC or product XZ. After 25 years CapitalBuilders plans to rent the building to tenants similar to the present tenants. To rent the building again, CapitalBuilders will need to restore the building to its present layout. The estimated cash cost of restoring the building will be $27,500 if product AC was manufactured and $100,000 if product XZ was manufactured. These costs can be deducted for tax purposes in the year the expenditure occur. Original building shell has a CCA rate of 5%. The building modifications will be depreciated using the straight-line method over a 25 year life. Equipment has a CCA rate of 20%. CapitalBuilders tax rate is 40% and the required rate of return is 10%. Assume all cash flows for a given year occur at the end of the year. The initial outlays for modifications and equipment will occur at t=0, and the restoration outlays will occur at the end of the year 25. Assume asset pools will remain open, What is the best alternative for CapitalBuilders?