equivalent annual cost and sensitivity analysis, Corporate Finance

Assignment Help:

Mad Cat Inc. is debating between two alternative earth moving machines to use for the next 8 years.  The first supplier, Double Candle, offers the necessary machinery (CCA rate = 30%) at an upfront cost of $5,450,000.  These machines are expected to last 4 years and then be salvaged for approximately $1,400,000 (the CCA pool remains open).   All the Double Candle machines would be salvaged and replaced after 4 years.  The alternative is to purchase significantly more expensive (but longer lasting) machinery from Elemental which would last the full 8 years but cost $8,650,000 and depreciate at the same CCA rate.  Elemental's machines have an expected salvage value of approximately $1,800,000.  Mad Cat pays a 25% tax rate and its cost of capital is 11%.

a)  Which of the two systems incurs the lowest overall cost for Mad Cat? 

b)  Making projections about cash flows in the future can be quite a difficult task for junior analysts.  For what salvage value on the Elemental machines would you be indifferent between the two options?

c)  At what price for the Elemental machines would you be indifferent between the two options (assuming $1,000,000 in salvage regardless of the purchase price).

d) How would you feel about your original decision in part a) if Element instead offered to let you finance the purchase for $1,450,000 per year for 8 years with each payment made at the beginning of each year.  The arrangement would enable Mad Cat to depreciate the asset as though it was owned the entire time, and to salvage it at the end of its useful life (a financial lease - the payments are not tax deductible).

 


Related Discussions:- equivalent annual cost and sensitivity analysis

Equity financing with debt financing, Seattle Health Plans currently uses z...

Seattle Health Plans currently uses zero debt financing.  Its operating income (EBIT) $1 million, and it pays taxes at a 40 percent rate.  It has $5 million in assests and because

#dividend policy, #the managing directors of three profitable listed compan...

#the managing directors of three profitable listed companies discussed their company''''s dividend policies. company A has deliberately paid no dividends for the past five years. c

Bond valuation, An investor buys a French government, 10-year bond, paying ...

An investor buys a French government, 10-year bond, paying annual coupon of 4.5%. Face value = 1000. The investor is unsure of his investment horizon and considers 5 horizons: 5, 6

Divident, Critically appraise how companies set their dividend policies, an...

Critically appraise how companies set their dividend policies, and explain the factors that a company will consider in setting its dividend policy and in determining the level of d

Management, i need a assignment on uk company to be submitted in my colleg...

i need a assignment on uk company to be submitted in my college how can u help

Calculate effective annual interest rate, Two years ago, Homeless People Lt...

Two years ago, Homeless People Ltd needed to accumulate a total of $600,000 by the end of four years to acquire new facility to house the homeless people in the city.  To do so, Ho

Desccribe the determination of foreign exchange rate, Question 1: (a) ...

Question 1: (a) Show that the pricing of Eurocurrency deposits and loans leads to lower profit margin by Eurobanks compared to onshore banks. (b) What are the factors that

Explain the negotiation of letter of credit in trade finance, Judges Maurit...

Judges Mauritius Co Ltd imports spare parts for cars from Dubai on a letter of credit basis, payable 60 days from ‘bill of lading' issue date. Each letter of credit is valid for 90

Describe the capital asset pricing model, Question 1: (a) Explain clear...

Question 1: (a) Explain clearly two semi-strong form tests of the Efficient Market Hypothesis (EMH), one supporting and one rejecting the EMH. (b) Summarise the evidence in

Write Your Message!

Captcha
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