Reference no: EM132036859
Two questions here, thank you for any assisstance
1. Would you invest in a 8,000,000 machine that makes widgets in a volume that would give you 3,000,000 in sales. COGS would be 1,000,000. SGA would be 250,000. The machine would have a 7 year useful life making widgets and has a scrap value of 1,000,000. It is depreciated by straight line depreciation. To make widgets with the machine you would need 200,000 in accounts receivable and 300,000 in inventory. The cost of capital for the company is 10%.
2. You have an opportunity to buy a gold mine for 1,000,000 that can currently produce 300,000 in gold a year. It is expected to produce gold for 5 years. Would you buy it? The cost of capital is 10 %. You can increase production by investing an additional 500,000 at the end of year 1 and the mine could produce 1,700,00 in gold for two years. There is the 50% probability the price of gold declines and 50% that it remains as in the first part of the problem and a 50% probability that it declines in value to 400,000 per year for two years.
For the capital budgeting problem the tax rate is 25%: 21% federal and 4% state.
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