+1-415-670-9189
info@expertsmind.com
Report annual cash flows
Course:- Financial Management
Reference No.:- EM13301




Assignment Help
Expertsmind Rated 4.9 / 5 based on 47215 reviews.
Review Site
Assignment Help >> Financial Management

Suppose your friend, Pat, approaches you with a plan to get in on the solar panel leasing business. Pat has identified an opportunity to acquire panels sufficient to power 25 homes. On average, Pat estimates that your enterprise will incur a cost of $1,000 for each installation. After that, each home installation will operate maintenance free and generate approximately $50 per month of revenue for 10 years.

Assume that due to the rapid rate of technological depreciation, there will be neither demand nor salvage value for these solar panels at lease expiry.

Assume you'll face a 40 percent tax rate. For tax purposes, you'll be able to depreciate the total cost of equipment and installation over 5 years in a straight-line manner.

Your required return can be estimated from Solarplex, a publicly traded pure-play solar panel leasing company with a beta of 2 and a debt-to-equity ratio of 1. You estimate that returns on a balanced market portfolio are 12 percent and the risk-free rate of borrowing is 4 percent.

Suppose, first, that Pat proposes you form an all-equity enterprise to invest in this opportunity. What is the maximum price you should pay for this inventory of panels? Report annual cash flows, even if you decide to use a compact formula for direct calculation. Use the APV/WACC method (recall, they're the same for a firm w/ no debt).

Suppose the seller is asking $50,000 for the total inventory of solar panels. Additionally, assume you can borrow $25,000 at 8 percent in the form of a five-year, interest-only loan, with the total principal retired via a balloon payment due in year 5. Does this investment make sense? Report annual cash flows, even if you decide to use a compact formula for direct calculation. Briefly explain why you are using the computational method chosen. (Hint: you will need to decide to use the APV or WACC formula. It is possible to compute either
/ both. But be careful -- given the nature of the debt-share-of-value in this project, one of these approaches is much more complicated than the other.)

Finally, assume that after lengthy negotiations, the seller will not take less than $42,000 for the panels you need. Through continuing research, however, Pat discovers that one-in-ten firms that have gone into this business have gone bankrupt.




Put your comment
 
Minimize


Ask Question & Get Answers from Experts
Browse some more (Financial Management) Materials
Discuss in detail what exactly a depository institution’s CAMELS rating measures. What is included when talk about Revenue Cycle in health care? The terms of the sale were 4/1
Several years ago, Rolen Riders issued preferred stock with a stated annual dividend of 11% of its $100 par value. Preferred stock of this type currently yields 10%. Assume di
How much money will Tom and Tricia have in 45 years if they do nothing for the next 10 years, then puts $2400 per year away for the remaining 35 years? How much money will Tom
What will the cost of the vehicle be at the end of three years and you want to save a equal amount at the end of each month for the next three years in order to pay cash for
Martin Company reports the following costs and expenses in May.From the information, determine the total amount of: (a) Manufacturing overhead. (b) Product costs. (c) Period c
Calculate the total number of shares to be acquired by CFR based on Adcock's market value of R70 per share - Determine the exchange ratio based on market values for the propos
Examine if it is possible for a company that has negative net income and negative operating cash flow to end the year with an increase in cash and an increase in stock price.
The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is "looking up." As a result, the cemetery project will prov