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

What do you understand by interest rate risk, Problem: Banks are net le...

Problem: Banks are net lenders, when they have excess funds, or net borrowers, when they have future deficits. As any lender or borrower, they cannot eliminate interest rate r

Methods based on advance demand information, Table gives the average MAPE f...

Table gives the average MAPE for all SKUs with positive preview demand together (overall) and also per preview demand class. Furthermore, the error percentages in bold were signi?c

Solve it please, Question 1 If the economy booms, RTF, Inc. stock is expec...

Question 1 If the economy booms, RTF, Inc. stock is expected to return 10%. If the economy goes into a recessionary period, then RTF is expected to only return 4%. The probability

Investment diversification strategy, The Brazilian economy in 2001 and...

The Brazilian economy in 2001 and 2002 had gone up and down. The Brazilian "real" (R$) had also been declining since 1999 (when it was floated). Investors wished to

WACC, CivilENG, LTD has a target capital structure of 35% debt and the rema...

CivilENG, LTD has a target capital structure of 35% debt and the remainder common equity. CivilENG’s cost of debt on the first $3 million borrowed is 7.5%, but that cost of debt in

Efficiency, differentiate between aloocative effiency and pricing effiency

differentiate between aloocative effiency and pricing effiency

Financial Ratios, I do not understand how ratios are calculated on MSN Mone...

I do not understand how ratios are calculated on MSN Money website. My homework assignment was to look up GM''s income statement and balance sheet for the last quarter and compare

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

Dividend Policy, How is data from the financial sites used to calculate div...

How is data from the financial sites used to calculate dividends.

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