Reference no: EM132613609

Question -

A) Kumquat Farms Ltd. has decided to acquire a kumquat picking machine. The cost of the picking machine is $45,000. At the end of seven years, the market (salvage) value is estimated to be $11,000. Seven years is the time horizon for analysis. The equipment has a CCA rate of 20 percent. The benefits of any tax shields are realized at the end of each year. The company's tax rate is 25 percent. Kumquat Farms' cost of capital is 16 percent.

An alternative method of financing the equipment would be to lease it from the local finance company. Annual lease payments, payable at the end of each of the next seven years, would be $7,750 before tax.

Should Kumquat Farms Ltd. lease or buy the picking machine? Show all calculations.

B) A Canadian company is exporting coal to Mexico. The company expects to receive a payment of seven million pesos in 60 days. The current spot rate is 102 pesos per CDN dollar.

If the company uses a forward contract to hedge and the 60 day forward rate is 100.5 pesos to the dollar how many dollars will it receive in 60 days?

What is the actual dollar effect on the company (gain or loss) if it does not hedge and the spot rate in 60 days is 103 pesos to the dollar?

Using the above information if the annual rate on Canadian government one year bonds is 3%, what is the annual rate on similar risk free Mexican bonds? Hint use Interest Rate Parity.