XYZ Inc., an Ontario-based company on the cutting edge of technology, is analyzing the possibility of providing university-level courses for York University. This virtual university setting would provide the next generation of online courses by using 3D simulated digital environment where users can attend lectures, work on group assignments, write exams and socialize using their own avatar. You have been hired by XYZ to perform an NPV analysis on the project. Below are the estimated expenses and revenues. Assume the cost of capital is 7% and the expected life of this new generation of online courses is four years.
As well, XYZ expects net revenues (after-tax) from existing online courses it supplies to be reduced by $150,000 each year.
(a) Should York proceed with this virtual course project?
(b) Does your decision change if depreciation is calculated straight-line (over four years), instead of declining balance? (The half-year rule still applies).