Galaxydoughs Tea Ltd. has been considering a special investment for some time. This project will require an immediate capital expenditure of $1 million for required equipment. Galaxydoughs Tea will house the equipment in an unused warehouse. Galaxydoughs Tea has no other intended use for the warehouse but is aware that it could be rented out at $70,000 a year. Galaxydoughs Tea will also use equipment purchased a year ago for $525,000 (current market value: $300,000) that was not ready for use, and therefore, had not been capitalized for the purposes of tax-related amortization. Cash flow before taxes and amortization is expected to be $355,000 a year for six years, at which time it will increase to $425,000 a year until the end of Year 12. At that time, all of the equipment that has been used can be salvaged for a mere $55,000. Additional working capital requirements related to this new equipment will be $50,000.

New equipment (and equipment previously purchased) CCA rate....... 30%
Tax rate . ...............................................................................................39%
Cost of capital .......................................................................................14%

a. Should Galaxydoughs Tea Ltd. proceed with the new project?
b. If Galaxydoughs Tea's cost of capital was not constant over the life of the project, how could this be handled within your analysis?