Find the minimum pretax earnings per year

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Reference no: EM131215771

Financial Management Assignment

Q1. Argentina Company has bought a machine, which has expected life 6 years, with standard deviation 1.5 years. While the machine is running, its expected annual earnings before taxes are $5000, with standard deviation $600. Assume normal probability distributions.

(A) What is the probability that the life of the machine is less than 5 years?

(B) Find the probability that the life of the machine is between 4 and 5 years.

Q2. Bolivia Company is planning to get a machine that will cost $270,522, which will last for 5 years. The company uses straight-line depreciation. The tax rate of Bolivia is 30% and the proper discount rate in this case is 10%.

(A) Find the minimum pretax earnings per year that the machine must generate to become profitable.

(B) Bolivia Company expects that the machine will have $70,000 pretax earnings annually, with a standard deviation of $20,000. Calculate the probability that the machine will turn out to be profitable.

Q3. Brazil Corp plans to buy some construction equipment for $50,000, which has a useful life of 5 years with no salvage value. Brazil uses straight-line depreciation. Brazil has a tax rate of 32%, and it uses a discount rate of 12%. The equipment will generate pretax income of $20,000 for the first year, but this figure will decline by 10% annually for the remaining four years. Should Brazil buy this equipment?

Q4. Chile Company is planning to buy a new corporate jet for $7 million. It will depreciate the jet fully in 5 years and then sell it for $6 million. The jet will use $60,000 in fuel annually, and its maintenance will be $40,000 annually. The tax rate of Chile is 31% and it uses 12% as discount rate. Find the minimum annual savings generated by the jet to justify its purchase.

Q5. Colombia Corporation is interested in buying a machine that will cost $53,000, depreciating it on straight-line basis over a 5-year period. The machine is expected to last for 8 years and then Colombia will sell it for $5,000. The expected earnings before taxes from the machine are $12,000 with a standard deviation of $3,000. The income tax rate of Colombia is 32%, and the proper discount rate is 13%.

(a) Find the minimum earnings before taxes that this machine should generate annually to justify its purchase.

(b) Find the probability that this machine will be profitable.

Q6. Guyana Oil Company is interested in buying a machine for $30,000, which it will depreciate uniformly over a four-year period. An analysis of the life expectancy of such machines reveals that 30% break down after 3 years, 30% run for 4 years, and 10% last for 5 years. The tax rate of Guyana is 33% and the risk-adjusted discount rate is 14%. If the machine can generate $11,000 per year in pretax earnings, should Guyana buy it?

Q7. Paraguay Company is interested in buying a machine with uncertain life. The following table shows its expected life and resale value:

Expected life	Probability	Resale value
4 years	20%	$20,000
5 years	30%	$10,000
6 years	50%	$5,000

The machine will save the company $20,000 annually while it is running. Paraguay will depreciate it fully on a straight-line basis in 4 years. The tax rate of Paraguay is 30%, and the proper discount rate in this case is 12%. The cost of the machine is $90,000. Should Paraguay buy it?

Q8. Peru Corporation plans to get a new machine for $90,000, which will save the company $25,000 annually. Peru will depreciate the machine on the ACRS with three-year life, the annual depreciation being 31%, 46%, and 23%. The machine will run for 7 years, and then Peru will sell it for $5,000. The company will use 13% as discount rate and its tax rate is 34%. Should Peru buy the machine?

Reference no: EM131215771

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