Reference no: EM133078519
Question -
a) Filkins Fabric Company has the opportunity to invest in one of two mutually exclusive knitting machines that will produce a product it will need for the foreseeable future. Machine A costs $190,000 and realizes after-tax inflows of $87,000 per year for 3 years. Machine B costs $360,000 and realizes after-tax inflows of $98,300 per year for 6 years. Assume that machine prices are not expected to rise because inflation will be offset by cheaper components used in the machines. The cost of capital is 14%. (Ignore CCA)
Required - What is the equivalent annual annuity for each machine? Which machine should be chosen?
b) Current exchange rates, 6 month forward exchange rates and risk free interest rates are as follows:
|
|
Spot Per C$
|
Fwd Per C$
|
Spot Per US$
|
Fwd Per US$
|
|
Australian Dollars
|
1.23901
|
1.22891
|
1.48038
|
1.47065
|
|
British Pounds
|
0.535174
|
0.5456
|
0.639427
|
0.6495
|
|
Canadian Dollars
|
1.00
|
1.00
|
1.1948
|
1.2231
|
|
Euro
|
0.655924
|
0.64993
|
0.783699
|
0.7811
|
Suppose interest rate parity holds.
If the current six-month risk-free rate in Britain is 4.4%, what must the six-month risk-free rate be in Canada?
c) The following spot rates are expressed in Canadian currency.
1.2789 Cdn = 1 U.S. dollar
1.8295 Cdn = 1 British pound
0.4876 Cdn = 1 West German Mark
Required - Use the above data to calculate the amount of British pounds, which can be acquired with 500,000 West German Marks.