Question

Antico Enterprises is about to begin on another venture. Rodrigo Gonzales, the faithful financial analyst, once again will examine the viability of this venture after 31 failures.

 

A number of windmills are to be constructedgenerate electricity. They will cost $474,000 and will last 10 years, at which time they will have an estimated salvage value of $24,000. However, a capital upgrade of $105,000 will be required at the end of five years. An inventory of spare parts (working capital) amounting to $11,000 will be required during the term of the venture and will be housed in a warehouse that is currently not being used, but which has been used for Antico's previous ventures. The warehouse could be rented out at $4,000 per year.

 

This enterprise is expected to generate cash from the sale of electricity of $153,000 a year for 10 years. Cash expenses for each of the 10 years will be $9,000.

 

The company’s tax rate is 30 percent, the CCA rate is 6 percent and the cost of capital is 23 percent.

 

Requirements:

A. Calculate the Net Present Value of the Windmill venture by completing the table below:

 

Event	Expected Cash Flow	After-tax Cash Flow	Present Value
Enter cash receipts as positive numbers, cash payments as negative numbers.
Inital Investment
Working Capital
Revenues
Expenses
Opportunity Cost
Capital Upgrade
Salvage
Working Capital Revcovery
CCA Tax Shield	N/A	N/A
Net present value	N/A	N/A

 

B.  What number did you use for (Cpv - Spv)?  

(Enter your answer as a positive number.)

 

C. Should Antico invest in the Windmill venture?