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1. Geraldine Price, the manager of Household Products has asked Doreen Spencer to analyze the possibility of introducing a new product WS -500. The product will have a useful life of six years after which the product will be replaced.

WS-500 will require special-purpose equipment costing $1,200,000. The useful life of the equipment is six years and an estimated terminal disposal price of $600,000. The equipment qualifies for 25% CCA rate.

The product will be produced in a plant which is currently being leased to another business for $60,000 per year. The lease has 6 years remaining. The lease contains a cancellation clause whereby the landlord can obtain immediate possession of the premises upon payment of $42,000 cash.

The old plant has a book value of $300,000 and is being amortized for accounting purposes on a straight-line basis at $30,000 annually.

Certain nonrecurring market research studies and sales promotion activities will amount to a cost of $375,000 at the end of year 1. The entire amount is deductible in full for income tax purposes in the year expenditure.

Additions to working capital will require $260,000 at the outset and an additional $240,000 at the end of two years.

Net cash inflow from operations before amortization and income taxes is expected to be $480,000 in years 1 and 2, $720,000 in years 3 to 5, and $400,000 in year 6.

Tax rate is 25% and cost of capital is 16%

Required:

1. Recommend if Household Products recommend launching WS-500?

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