Reference no: EM132889445

Real Company buys copper from a number of suppliers, including Solid Copper Company. The president of Solid Co. has offered to sell Real Co. up to 1,000,000 pounds of copper per year for five years at P 8 per pound if Real Co. will lend Solid Co P2,000,000 at 8% interest. The loan would be repaid at the end of five years; the interest would be paid annually. Real Co. uses at least 1,800,000 pounds of copper per year and expects the price to be P10 per pound over the next five years. The tax rate is 40% ad Real Co. management considers the relevant discount rate to be 12%.

Required:

Problem 1) Determine whether Real Co should accept the offer or not.

Problem 2) Determine the minimum price at which copper would have to sell per pound over the next five years to make accepting the offer worthwhile.