Explain and defend the capital budgeting method

Assignment Help Finance Basics
Reference no: EM131594821

Q 1. Riley Root Beer Company is considering the purchase of a new bottling machine as part of its expansion plan into other flavors of soda. Machine A costs $2,900,000 and will last for six years. Variable costs are expected to be 35% of sales and fixed costs are $170,000 per year. Machine B costs $5,100,000 and will last for nine years. Variable costs for this machine are 30% of sales and fixed costs are $130,000 per year. Machine B is considered to be the gold standard of bottling machines, is expected to be more reliable, and hence estimates of its cost are more certain than those of Machine A.  Both machines will be depreciated on a straight line basis and are expected to have zero salvage value at the end of their useful lives. Regardless of which machine is chosen, the additional soda sales from the new flavors are expected to be $10 million per year. Riley's weighted average cost of capital is 10% and its tax rate is 35%.

a. Which machine should Riley Root Beer purchase?  Support your answer with appropriate calculations.

b. Explain and defend the capital budgeting method, and any necessary adjustments to it, that you used in making your decision.

Note: The calculations to be shown in Excel. I am fine with part b. So even few line from you will be fine. CONCENTRATE ON PART A. There are no attachment files.

Comments: I have shortened the question and since you said you have already tried it, I am opening the Q for you for the next 8 hours. I have full confidence in your work.

Reference no: EM131594821

Questions Cloud

Evaluate the performance of ltcm : Evaluate the performance of LTCM discussing the unique arbitrage it used to exploit in US. Are there any pressures that emerge due to such performance?
Shareholder wealth maximization and the financial manager : Is there a conflict between the goal of shareholder wealth maximization and the financial manager's need to act in an ethical manner?
Review the five stage model of team development : Team Development Model - Review the five stage model of team development in the required reading of Chapter 11.
Annual return using the geometric average : In the rst year the stock's return was +30%, in the second year -25%. How much was his annual return using the Geometric average?
Explain and defend the capital budgeting method : Explain and defend the capital budgeting method, and any necessary adjustments to it, that you used in making your decision.
Estimate the price per share of young common stock : Estimate the price per share of Young’s common stock. What is the maximum price per share the private equity firm can justify bidding for control of Young?
Required return or the annual coupon rate : How do I set up this problem? Do I use the current mart required return or the annual coupon rate?
Determine the time-limited sequence : Calculate the DFT of the time-limited sequences specified in Examples 12.1(i)-(iv) using the matrix-vector approach.
Risk investment when investors hold diversified portfolios : Does this necessarily imply that wildcat oil drilling is a high risk investment when investors hold diversified portfolios?

Reviews

Write a Review

 

Finance Basics Questions & Answers

  Financial reporting and analysis

Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..

  A report on financial accounting

This report is specific for a core understanding for Financial Accounting and its relevant factors.

  Describe the types of financial ratios

Describe the types of financial ratios and other financial performance measures that are used during venture's successful life cycle.

  Differences between sole proprietorship and corporation

Briefly describe the major differences between a sole proprietorship and a corporation

  Prepare a cash budget statement

Calculate the expected value of the apartment in 20 years' time. What is the mortgage loan repayment at the beginning of each month

  What are the implied interest rates

What are the implied interest rates in Europe and the U.S.?

  State pricing theory and no-arbitrage pricing theory

State pricing theory and no-arbitrage pricing theory

  Small business administration

Identify the likely stage for each venture and describe the type of financing each venture is likely to be seeking and identify potential sources for that financing.

  Effect of financial leverage

The Effect of Financial Leverage and working capital management

  Evaluate the basis for the payment to the lender

Evaluate the basis for the payment to the lender and basis for the payment to the company-counterparty.

  Importance of opps, ipps, mpfs and dmepos

Research and discuss the differences and importance of : OPPS, IPPS, MPFS and DMEPOS.

  Time value of money

Time Value of Money project

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