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

Fundamentals of Corporate Finance, What is the industry average price-earni...

What is the industry average price-earnings ratio? What is the price-earnings ratio for Ragan, Inc.? Is this the relationship you would expect between the two ratios?

IRR & WACC, I have been given 3 different types of projects. They state th...

I have been given 3 different types of projects. They state the IRR and how much the project will add. The question goes on to give a WACC with break points. The question wants

CURRENT PRICE SHARE, Assume the market returns to be 9% and the risk-free r...

Assume the market returns to be 9% and the risk-free rate to be 1.25%. Assume also that shell has just paid an annual dividend of $1.41 and that dividends will grow at 5% for the f

Calculate the true share price, GeKay stock is worth $100, or $80, or $60. ...

GeKay stock is worth $100, or $80, or $60. Investors believe that each case is equally likely so that the current share price is the average, namely $80.  Suppose Mr. Satanak, th

Standard deviations and correlations, Suppose you are given the expected ye...

Suppose you are given the expected yearly returns and standard deviations and correlations shown in the tables below: The market portfolio has an expected return of 18% and

Explain internal rating system, Question 1: ‘An internal rating system ...

Question 1: ‘An internal rating system may incorporate supplementary customer information which is usually out of the reach of an external credit assessment institution.' Discu

Main types of estimating methodology, (a) Accurate estimation is crucial f...

(a) Accurate estimation is crucial for effective planning and control and is related with time, information, experience of estimator, techniques used and funding. Discuss the thre

How could phoenix activity be addressed, Q. How could phoenix activity be a...

Q. How could phoenix activity be addressed? A range of actions have been suggested to mitigate phoenix activity. These suggested actions were selected on the basis of: - pr

Describe what a firm wants to achieve through pricing, Question: (a) ...

Question: (a) (i) Introduction and development- negative cash flows, low turnover, large overheads due to marketing expenses, marketing mix includes sales promotion.

Basis of npv and irr, Suppose that Oxford Inc. is interested in the two new...

Suppose that Oxford Inc. is interested in the two new products, AME and CGK. Because of its capital budget constraint, it can only launch one new product line. Eric just graduated

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