Reference no: EM132002201

Quality Delights has the possibility to embark on an exciting overseas investment. To date $75,000 in exploratory expenses have been incurred and the investment project now looks viable. You have been asked to analyze and validate the project at this time. Machinery will cost $500,000 now and an additional $200,000 one year from now. Both of these capital costs will be added to an asset pool with a CCA rate of 30 percent. It is estimated that ten years from now all the machinery, could be salvaged for $70,000. The investment will begin to generate yearly revenues of $410,000 in years 2 to 10 [9 years]. Cash flow expenses of $175,000 a year would begin in year 1 and continue to year 10 [10 years]. This new venture is partially competitive with an existing product line of the company. That product line will suffer a decline in annual revenues of $60,000 once this product comes on stream in year two [9 years]. Because of efficient inventory and receivable turnover as compared to payables requirements the probable increase in current liabilities will be $40,000 for the length of the project (when the revenues kick in at beginning of the second year). Quality Delights has a tax rate of 25 percent and it has an opportunity cost of capital (WACC) of 9 percent. Should Quality Delights proceed?