Clueless Company, a successful business enterprise, is considering a new capital project with a degree of risk 50 percent higher than its normal business ventures. The new project would involve an investment of $375,000 in new equipment that would generate annual cash flow revenues of $200,000 over the 15 years of the project. Annual cash flow expenses over the same period would be $85,000. The product made on the new equipment would be sold on terms of net 60 (with working capital implications) . Expenses would not be on credit. At the end of the project, the equipment could be sold for scrap and would recover $15 ,000 for Clueless.
The Clueless Company has a tax rate of 30 percent and its cost of capital is 12 percent.
The CCA rate on the new equipment would be 30 percent. Should Clueless proceed with the new project?