What does the term sunk cost refer

Assignment Help Financial Management

Reference no: EM131980763

A new heat treatment furnace to be used by an aluminum fabrication plant in Southern Ontario costs $30,000 to buy. The new furnace will also cost the plant $1, 200 immediately in installation and training expenses. Operating and maintenance costs are estimated at $3,000 for the first year, and to increase by $1, 320 per year thereafter. The scrap value of the furnace can be estimated at any time by a declining-balance rate of 15% and the interest rate is 10%.

a) Determine the EAC (Equivalent Annual Cost) for the furnace over one year, two years, three years and four years of service life.

b) How often should the furnace be replaced, assuming cash flows and interest rates are to be constant over the plant time horizon?

c) What depreciation rate will lead to $3,000 book value for the furnace after four years of use?

d) What does the term "sunk cost" refer to and how would it affect a replacement decision?

Reference no: EM131980763

Questions Cloud

What will be optimal cash return point : The trading cost per sale or purchase of marketable securities to be $31.50 per transaction. What will be its optimal cash return point?

What is net present value of the loan : What is the net present value of the loan to TTC if the firm’s tax rate is 34 percent and it accepts the county’s offer?

What is the equipment after-tax salvage value : Karsted can sell the used equipment today for $8.75 million, and its tax rate is 30%. What is the equipment's after-tax salvage value?

What is company float and maximum daily charge : What is the company's float? What is the highest daily fee the company should be willing to pay to eliminate its float entirely?

What does the term sunk cost refer : What does the term "sunk cost" refer to and how would it affect a replacement decision?

Levered cash flows using the levered cost of equity : Computing the PV of the cash flows using the cost of equity for an all-equity firm. Discounting the levered cash flows using the levered cost of equity.

Interest rate on the loan with compensating balance : How low would the interest rate on the loan with the compensating balance have to be for you to choose it?

The interest rate on the loan with the compensating balance : How low would the interest rate on the loan with the compensating balance have to be for you to choose it?

Explain the exchange rate risk : Explain the exchange rate risk and how you could hedge the risk.

User Account

All Pages