Reference no: EM133122761
UNIK Autos is considering replacing the old assembly line with the new one at their Unik Mini Manufacturing Plant in Trois Riviere, Quebec. The old assembly line has a current market value of $10,000,000 and zero salvage value after 10 years. The new assembly line will generate incremental pre tax cash flow of $5,000,000 per year for 10 years and will have zero salvage value after 10 years of use. The assembly line will be depreciated at a CCA rate of 30%. UNIK Autos is in 40% tax bracket and r0 = 10%. Treasury bills are yielding 3% rate of return.
a. What is the maximum price UNIK should be willing to pay for the assembly line?
b. Suppose the price of the new assembly line is $40,000,000. UNIK will issue $20,000,000 worth of debt to finance the purchase. Under the loan agreement UNIK will pay 6% interest annually on the outstanding balance. UNIK will also make year end principal payments of $5,000,000 per year, completely retiring the issue at the end of 4th year. Ignore cost of financial distress and issue cost. Determine APV.
c. To encourage UNIK to replace old assembly line, Quebec Government is willing to lend $20,000,000 at an interest rate of 2% per year for 5 years. Principal to be repaid at the end of 5th year. Now what is the maximum price UNIK would be willing to pay for the assembly line?
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