Question 1 Trail Holdings (Trail), a vintner located in the Okanagan Valley, is considering opening a distribution centre in Toronto. The proposed site for the centre is a block of land that Trail purchased two years ago for $500,000. Building the centre is projected to cost $750,000. In addition, Trail will have to spend $100,000 on new equipment and make an investment in net working capital of $250,000. In making its capital-budgeting decision, Trail has decided to use a five-year planning horizon, which coincides with the estimated life of the new equipment. Both the building and the equipment will be depreciated on a straight-line basis to zero salvage value, with the building over 20 years and the equipment over five years. An independent appraiser has said that the value of the land is currently $600,000 and that it should be worth $800,000 in five years. The appraiser also believes that the building will be worth 70% of its original cost in five years. Trail's marginal tax rate is 28%, its weighted average cost of capital is 17%, and the applicable CCA rates on the new building and the new equipment are 6% and 20%, respectively. Both assets qualify for the Accelerated Investment Incentive, and therefore 1.5 times the CCA can be claimed in the year of acquisition. Assume that on disposal, there are still assets remaining in the classes, and that the UCC balances will still be positive after the deduction of the proceeds. Distribution is considered less risky than making wine, and the risk-adjusted discount rate has been estimated to be 15%. Finally, based on market analysis, Trail has developed the following pro forma income statements for the centre: Year 1 Year 2 Year 3 Year 4 Year 5 Revenues $ 620,000 Cost of goods sold 310,000 $750,000 375,000 $ 800,000 400,000 $800,000 $850,000 400,000 425,000 Depreciation 57,500 57,500 57,500 57,500 57,500 317,500 342,500 342,500 367,500 Income before taxes 252,500 Required: Based on the NPV method, should Trail open the new distribution centre?