Considering the purchase a high speed drill to replace

Assignment Help Finance Basics
Reference no: EM131134378

La Familia Company limited is considering the purchase a high speed drill to replace the old one that they currently have.

The old drill was purchase 3 years ago at an installed cost of $500,000 and is estimated to have a usable life of 5 years.

The new drill is expected to cost $850,000 with $20,000 to be spent on installation and also has a 5 year usable life.

La Familia can sell the old drill at $60,000 inclusive of removal cost.

The purchase of this new drill will result in increase business and impact on the following:

  • Accounts Receivable increase by $55,000
  • Inventories by $25,000
  • Accounts payable by $42,000

At the end of the 5 years the new drill will have a residual value of $50,000 and should be sold for that amount.

La Familia funds it assets as follows:

Long term Bonds 25%

Preferred stock25%

Common stock50%

The interest on the bonds is 8%. The preferred stock pays dividends of 10%. The risk free rate is 4%, the beta on La Familia's stock is 1.2 and the market risk premium is 8%.

La Familia tax rate is 25%

Straight line method of depreciation applies.

Earnings before depreciation and taxes are as follows:

Year

New Drill

Old Drill

1

$125,000

$35,000

2

$250,000

$30,000

3

$275,000

$28,000

4

$275,000

$22,000

5

$175,000

$10,000




  1. Calculate the initial Investment for the replacement of the old drill with the new drill.
  2. Calculate the incremental operating cash flows that is expected from the purchase of the new drill.
  3. What is the terminal cash flow at the end of year 5 due to the replacement of the old drill with the new one.
  4. Should the new drill be purchased based on NPV analysis and IRR?
  5. What other factors need to be consider before the decision to replace the old machine is made.

Reference no: EM131134378

Determine jane total cash inflows and cash outflows

It is typical for Jane to plan, monitor, and assess her financial position using cash flows over a given period, typically a month. Jane has a savings account, and her bank

She invest annually in her ira

Joan wants to start an IRA that will have $250,000 in it when she retires in 29 years. How much should she invest annually in her IRA to do this if the interest is 13% compo

Chesteris planning to conduct exit interviews

Assume Chester Corp. is downsizing the size of their workforce by 20% (to the nearest person) next year from various strategic initiatives. Chesteris planning to conduct exi

The npv & payback method

Suppose you are evaluating a project with the cash inflows shown in the following table. Your boss has asked you to calculate the projectAc€?cs NPV. You donAc€?ct know the

A banker who have access to the above rates

Assume that you are a banker who have access to the above rates. What EUR/USD rate or USD per Ac‚¬ would you quote for an exporter who is interested hedging its EUR100m cash

Digby plans to spend an additional

Digby's turnover rate for this year is 6.31%. This rate is projected to remain the same next year and no further downsizing will occur from automating. Digby plans to spend

The expected return and probability distribution

1.Compute the expected risk and returns of the portfolio with 50% investment in asset X 2. Calculate the portfolio risk assuming that the correlation of the two assets X and

The financial analyst for a manufacturer of tennis rackets

You are the financial analyst for a manufacturer of tennis rackets that has identified a graphite-like material that it is considering using in its rackets. Given the follow

Reviews

Write a Review

 
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd