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You are in charge of procuring a machine for your factory. The process will take about a year to complete and is a major investment in specialized equipment that will make or break the profitability of the company. It is expected the equipment will offer a 7 year advantage after which it will need to be replaced. There is a choice of the manufacturer of the equipment. Manufacturer A will provide their model with a capacity of 1,000 widgets per year guarantee, and the equipment will require maintenance for 2 weeks each year. The procurement cost will be $1 million in Korea. The delivery costs from Korea to the US factory will be $95,000. Total costs will be $10 per widget and the revenue will be $25 per widget. The competitor Manufacturer B offers a model from Germany at a cost of $1.2 million, with a delivery cost to the US factory of $100,000 and a capacity of 1,150 widgets per year. The total costs for operation will be $9 per widget, and the machine will require maintenance every 2 years for 2 weeks. The demand for the widgets is expected to be 1,000 widgets per year for years one to three inclusive, and thereafter at 1,100 widgets per year for the remainder of the lifetime of the equipment. Maintenance cost will be $10,000 per week for Manufacturer A and $9,000 per week for Manufacturer B. The revenue and costs will escalate by 4% per year over the lifetime of the machine, as will the maintenance costs. The first maintenance cost is the expected value and escalation occurs after this first maintenance. Complete a TCO analysis for these two machines. Show the NCF and the NPV for each of the machines. Questions: Which machine would be purchased if the decision is made solely on price? What is the NCF for each Machine? What is the NPV for each machine if the discount factor is 15%? Which of these machines should the company purchase based on a TCO analysis? Is the investment value to the company worth undertaking if the WACC for the company is 13%?
Crackle and Pop Telephone Company is considering an upgrade to their current call-waiting equipment. Their existing hardware was purchased 3 years ago for $150,000, has been depreciated straight line over a 5-year useful life (so, two years of deprec..
Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10.0%, Division B's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division A's projects are equally risky, as are all of..
The security market line is graphical representation of
Statements about the flexibility, cost and riskiness of short-term versus long term debt depend to a large extent on the type of short-term financing that is actually used. Three major types of short-term financing--accruals, accounts payable and ban..
You own a portfolio that has $3,100 invested in Stock A and $4,200 invested in Stock B. Assume the expected returns on these stocks are 11 percent and 17 percent, respectively. What is the expected return on the portfolio?
A friend says she expects to earn 13.50% on her portfolio with a beta of 1.50. You have a two-asset portfolio including stock x and a risk free security. The expected return of stock x is 10.50 and the beta is 1.10. The expected return on the risk fr..
Consider the following information: Rate of Return if State Occurs State of Probability of Economy State of Economy Stock A Stock B Stock C Boom 0.15 0.37 0.47 0.27 Good 0.45 0.22 0.18 0.11 Poor 0.35 − 0.04 − 0.07 − 0.05 Bust 0.05 − 0.18 − 0.22 − 0.0..
The parameters for the Retirement Plan are that you can use real information or fictional characters. Begin with a little history about the person or family (Age and stage of life). Next I would like to see net worth statement and a cash flow stateme..
Opie, Inc. is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000. The future after-tax cash inflows from its project for years 1 through 8 are the same at $38,000. Opie uses the net present value meth..
You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.31 and the total portfolio is equally as risky as the market. What must the beta be for the other stock in your portfolio?
A three-year continuous annuity pays a total of $100 during the first year, $400 during the second year, and $1,000 during the third year. Within each year, the payments are made continuously and evenly throughout the year. The effective annual inter..
What is the future value of $1,210 a year for 7 years at a 9 percent rate of interest? ne year ago, the Jenkins Family Fun Center deposited $4,700 in an investment account for the purpose of buying new equipment four years from today. Today, they are..
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