Vtech has done development work on an exciting new phone. To date, it has spent $800,000 on research and development and is wondering whether to continue the development and eventual production of the new phone. The work to date has no value except to Vtech for the further development and production of the new phone.

It is expected that another $500,000 will be incurred in development work over the next year at which time it will be capitalized along with the equipment that will be purchased (one year from today) to produce the new phone. The cost of the equipment is estimated at $1,200,000.

Vtech will house the equipment and new production process in an unused warehouse. The unused warehouse could have been rented out at $150,000 per year, but the company had elected to keep it unoccupied until now.

Cash flow before taxes and CCA is estimated at $800,000 per year over the ten years of the products life. Working capital requirements necessitated by this new product line will increase by $50,000. The potential salvage value of the equipment is $120,000 eleven years from today. For the present value calculations round to the nearest dollar. CCA rate: 30% Tax rate: 25% Cost of capital: 20%

Should Vtech continue the development and production of the new phone?