Samborski Enterprises Ltd. is a successful Canadian-controlled private corporation operating a plumbing contracting business. The company consistently earns pre-tax profits in excess of $600,000.The profits are typically used to expand the company’s own business or to buy out smaller businesses in the same industry. Usually, these acquisitions have been successful; they have provided after-tax returns on investment of between 14% and 20%.

Three years ago, the company invested $300,000 in common shares of TQ Ltd. This represented a 30% interest in that company. The other shares were acquired by two other investors. Samborski and the other shareholders created TQ to manufacture a new type of pipe that was expected to revolutionize the plumbing industry. The venture was not successful, and the shareholders decided to shut down the operations. After the assets were sold and the liabilities were paid, there was nothing left for the shareholders. Over the three years, the company had lost $1,000,000, as follows:

Year 1………………………….	$ 500,000
Year 2  ………………………….	300,000
Year 3 (including the sale of assets)…..	200,000
………………………….	$1,000,000

The shareholders were relieved to close the business before further losses were incurred, as they would have had to either contribute additional capital or declare bankruptcy. They have instructed their lawyer to wind up the corporation. At the time the venture was organized, the investors had considered structuring the venture as a partnership. But after only a brief discussion, the idea was rejected because of the potential risk associated with the venture; as well, none of the parties had wanted exposure beyond their initial investment.

Required:

1. Considering that Samborski Enterprises invested $300,000 in share capital three years ago, what after-tax cash loss has it suffered from this investment? Determine the loss on a net present value basis.

2. How much would Samborski Enterprises have lost if it had chosen a partnership structure for TQ, rather than a corporate structure?

3. “If the partnership structure had been used, the new venture could have lost even more money and Samborski Enterprises would have been no worse off than if it had used the corporate structure and lost $1,000,000.” Is this statement true? If it is, what would have been the amount of this extra loss?

4. Assume the following scenario: TQ was organized as a partnership, but to ensure limited liability, Samborski Enterprises organized a subsidiary corporation, to which it contributed capital of $300,000; the subsidiary corporation then invested the $300,000 as a partner of TQ. Explain how Samborski Enterprises might have utilized its $300,000 loss, and calculate the amount of its after-tax cash loss in a manner similar to that used in 1 and 2 above.