equivalent annual cost and sensitivity analysis, Corporate Finance

Assignment Help:

Mad Cat Inc. is debating between two alternative earth moving machines to use for the next 8 years.  The first supplier, Double Candle, offers the necessary machinery (CCA rate = 30%) at an upfront cost of $5,450,000.  These machines are expected to last 4 years and then be salvaged for approximately $1,400,000 (the CCA pool remains open).   All the Double Candle machines would be salvaged and replaced after 4 years.  The alternative is to purchase significantly more expensive (but longer lasting) machinery from Elemental which would last the full 8 years but cost $8,650,000 and depreciate at the same CCA rate.  Elemental's machines have an expected salvage value of approximately $1,800,000.  Mad Cat pays a 25% tax rate and its cost of capital is 11%.

a)  Which of the two systems incurs the lowest overall cost for Mad Cat? 

b)  Making projections about cash flows in the future can be quite a difficult task for junior analysts.  For what salvage value on the Elemental machines would you be indifferent between the two options?

c)  At what price for the Elemental machines would you be indifferent between the two options (assuming $1,000,000 in salvage regardless of the purchase price).

d) How would you feel about your original decision in part a) if Element instead offered to let you finance the purchase for $1,450,000 per year for 8 years with each payment made at the beginning of each year.  The arrangement would enable Mad Cat to depreciate the asset as though it was owned the entire time, and to salvage it at the end of its useful life (a financial lease - the payments are not tax deductible).

 


Related Discussions:- equivalent annual cost and sensitivity analysis

Evaluate the capital structure, Question: (a) According to Modigliani a...

Question: (a) According to Modigliani and Miller's Theory of Capital Structure (1963), companies should make maximum use of gearing. Briefly, describe factors which might pr

Time Value of Money, Assume that the average age of the worker is 25 years ...

Assume that the average age of the worker is 25 years old. Typically, retirement is at 65. The firm provides a $2000 monthly payment for 25 years for retirees (i.e., 300 monthly

Free cash flow, Hi, I''m looking for a tuttor that can help analysing free ...

Hi, I''m looking for a tuttor that can help analysing free Cash flow for a Company - for an exam I''m preparing for.

Methodology of an event study, Methodology of an Event Study In this s...

Methodology of an Event Study In this section we outline the methodology of an event study. In suc- ceeding sections we apply the methodology to a number of different cases. A

Calculate the stock rate of distribution, A owns all of the stock of X.  Th...

A owns all of the stock of X.  The stock's basis is $100.  X has a total of current and accumulated earnings and profits of $50.  X distributes $200 cash to A "with respect to his

Explain foreign exchange market, Question: a) Using illustrative and ...

Question: a) Using illustrative and numerical examples, differentiate between arbitraging and speculation in the context of foreign exchange market. b) One year borrowing

Mergers and acquisitions had on a customers access to branc, What effect ha...

What effect have mergers and acquisitions had on a customers access to branches? A: A branch closing which has resulted from a merger need not necessarily mean a lost relations

Cost of capital, i have a project due on the cost of capital for a specific...

i have a project due on the cost of capital for a specific company 3500 word limit, can you help me

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd