Considering the installation of a high-tech handling system

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A large automobile manufacturing company is considering the installation of a high-tech handling system. The initial cost of the system is $3,000,000 and it is estimated it will save $750,000 per year in manual labor, and will incur $27,500 in operating expense the first year increasing by $100 per year for every year thereafter. The salvage value at the end of the system’s 10 year life will equal the cost of removal. The company’s hurdle rate (MARR) is 12%. To help finance this project, the company marketed a $3,000,000 ten year bond paying 10% semi-annually. You have personally researched this company and feel confident this company will have the cash available to pay its debt of $3,000,000 when the bond becomes due and you also feel confident that the company has the liquidity (available cash) to pay its semi-annual interest payments to its bond holder as they become due over the life of the bond. Five years has passed and you notice this bond is available for sale. The market for similar quality bonds paying semi-annual interest is now 8%. If you purchase this bond and hold it until maturity, how much should you pay for this bond to ensure you receive at least an 8% return?

Reference no: EM13751805

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