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Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $15 million. The system will last 5 years. Do-It-Right sells a sturdier but more expensive system for $21 million; it will last for 7 years. Both systems entail $2 million in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives; neither will have any salvage value at the end of its life. The firm’s tax rate is 20%, and the discount rate is 12%. Either machine will be replaced at the end of its life.
a. What is the equivalent annual cost of investing in the cheap system? (Do not round intermediate calculations. Enter your answers as a positive value. Enter your answers in whole dollars, not in millions.)
b. What is the equivalent annual cost of investing in the more expensive system?
c. Which system should Blooper install?
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Snyder Co. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next 2 years, at 13% in the third year, and at a constant rate of 6% thereafter. Snyder’s last dividend was $1.15, and the re..
ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. Calculate his total cash flow and rate of return.
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