Smith Electronics Ltd. (Smith) manufactures portable CD and DVD players for a well-known international distributer. As the chief financial officer for Smith, you are currently evaluating a major expansion plan. While the plan itself is likely to have a much longer term impact on the firm?s profitability, Smith has always taken a relatively risk-averse view to capital expenditures and has used a four-year planning horizon, which it will do again in this instance.

A will also be required.

To help with the analysis, the controller?s office has provided the following projected income statements for the project (all figures in 000?s):

Finally, Smith?s marginal tax rate is 35% and its weighted-average cost of capital is 10%. The applicable CCA rates on the new building and the new equipment are 5% and 25%, respectively.

Required

Based on the net present value (NPV) method, determine whether Smith should undertake the proposed expansion plan.

Revenues Cost of goods sold Amortization Interest expense Tax expense Net income Year 1 $ 10,500 7,500 575 300 744 1,381 Year 2 $ 11,000 7,800 575 300 814 $1,511 Year 3 $ 12,500 8,500 575 300 1,094 $ 2,031 Year 4 $ 13,500 8,800 575 300 1,339 $ 2,486