Should you acquire the machine

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Question - You are looking at purchasing a Vowel producing machine which will cost $7,500,000. This will increase revenues by $1,200,000 per year for the next 12 years and will have no salvage value. The machine fits into the 25% CCA class and the tax rate is 35%.  Your firm is financed by two forms of equity and one form of debt with a debt to equity ratio of 1.2. The class A equity which represents 60% of all equity sells for $30.14 just paid a dividend of $1.75 which is expected to grow at 2% indefinitely. 

The class B equity has a covariance with the market of 0.0051. The expected return of the market portfolio is 11.5%, with a variance of 0.00408007 and the risk-free rate is 2%. The bonds which mature in 20 years pay an annual coupon of 80 dollars and are priced at $1075. The floatation costs on equity A are 6.5%, the floatation costs on equity B are 4.5% and the floatation costs on debt are 3%.

Should you acquire the machine?

Reference no: EM133029000

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