Reference no: EM132711639
You are considering the purchase of a new zippy fabricating machine for your firm, Cherry Enterprises, Inc. In order to analyze the decisions to manufacture and sell the walking sticks and to lease the zippy, you have collected the following data, some of which may be relevant (all dollars in 2020 prices):
Cost of zippy = $8,500,000
Useful life of zippy = 10 years
Salvage value of zippy = $0
Expected walking stick sales volume (in lots of 1000) = 2500/year
Wholesale price per 1000 lot of walking sticks = $999
Annual zippy maintenance contract costs (no inflation) = $100,000 (only cash fixed cost)
Average variable cost per lot of walking sticks = $500
Additional working capital (supplies inventory) required at beginning of year 1 = $150,000
Current equity = $50,000,000
Current debt = $58,000,000
Tax rate for CEI = 35%
Inflation rate = .03
The following data pertain to financing options:
Required return on equity (real) = .06
Bank loan interest rate available, given current capital structure = .085
Lease contract with payments made in 10 equal annual installments, beginning at start of lease period. Lease contract includes maintenance costs. Payment = $1,150,000
Evaluate the zippy as a business opportunity for CEI. Evaluate the lease financing option for the zippy as well
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