Question
In: Accounting
Cathy Smith from Cathy’s Cool Constructions Pty. Ltd. is considering investing in some equipment to expand...
Cathy Smith from Cathy’s Cool Constructions Pty. Ltd. is considering investing in some equipment to expand her business and has asked for your advice regarding the 2 options she has available, and has given the information below. The company pays a 30% flat rate of company tax.
The current sources of funds and associated costs are as follows:
|
Source of funds |
Value ($) |
Cost % before tax |
|
Owners’ Equity |
$874,500 |
10.0% |
|
Mortgage |
$525,000 |
4.0% |
|
Vehicle Loan |
$41,000 |
12.0% |
1A. Equipment Option 1 costs $50,000, will last 5 years and then become obsolete and be worth nothing. It is expected to bring in approximately $18,000 additional cash revenue each year.
i. Given the current sources of funds and capital structure above, calculate the Weighted Average Cost of Capital for Cathy’s Cool Constructions Pty. Ltd.
ii. Using the straight line method of depreciation, calculate the annual depreciation expense. Show your workings
iii. Calculate the additional profit per year after tax and the additional net cash inflow per year. Show your workings.
iv. What is the Average Rate of Return for Option 1?
v. What is the Payback Period (in years) for Option 1?
vi. What is the Net Present Value for Option 1?
vii. Is Option 1 a viable option? Discuss using your answers to parts iv, v and vi to support your reasoning.
Solutions
ekkarill92 answered 2 years agoRelated Solutions
Cathy Smith from Cathy’s Cool Constructions Pty. Ltd. is considering investing in some equipment to expand...
Cathy Smith from Cathy’s Cool Constructions Pty. Ltd. is
considering investing in some equipment to expand her business and
has asked for your advice regarding the 2 options she has
available, and has given the information below. The company pays a
30% flat rate of company tax.
The current sources of funds and associated costs are as
follows:
Source of funds
Value ($)
Cost % before tax
Owners’ Equity
$874,500
10.0%
Mortgage
$525,000
4.0%
Vehicle Loan
$41,000
12.0%
1B. Equipment...
Cathy Smith from Cathy’s Cool Constructions Pty. Ltd. is considering investing in some equipment to expand...
Cathy Smith from Cathy’s Cool Constructions Pty. Ltd. is
considering investing in some equipment to expand her business and
has asked for your advice regarding the 2 options she has
available, and has given the information below. The company pays a
30% flat rate of company tax.
The current sources of funds and associated costs are as
follows:
Source of funds
Value ($)
Cost % before tax
Owners’ Equity
$874,500
10.0%
Mortgage
$525,000
4.0%
Vehicle Loan
$41,000
12.0%
1A. Equipment...
Cathy Smith from Cathy’s Cool Constructions Pty. Ltd. is considering investing in some equipment to expand...
Cathy Smith from Cathy’s Cool Constructions Pty. Ltd. is
considering investing in some equipment to expand her business and
has asked for your advice regarding the 2 options she has
available, and has given the information below. The company pays a
30% flat rate of company tax.
The current sources of funds and associated costs are as
follows:
Source of funds
Value ($)
Cost % before tax
Owners’ Equity (a)
$874,500
10.0%
Mortgage (b)
$525,000
4.0%
Vehicle Loan (c)
$41,000...
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below. The equipment has a 3-year class life and will be
depreciated by the MACRS depreciation system, and it will have a
positive pre-tax salvage value at the end of Year 3, when the
project will be closed down. Also, some new working capital will be
required, but it will be recovered at the end of the project's
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whose data are shown below. The equipment has a 3-year class life
and will be depreciated by the MACRS depreciation system, and it
will have a positive pre-tax salvage value at the end of Year 3,
when the project will be closed down. Also, some new working
capital will be required, but it will be recovered at the end of
the project's life. Revenues and cash operating costs are expected
to...
Thomson Media is considering investing in some new equipment whose data are shown below. The equipment...
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whose data are shown below. The equipment has a 3-year class life
and will be depreciated by the MACRS depreciation system, and it
will have a positive pre-tax salvage value at the end of Year 3,
when the project will be closed down. Also, some new working
capital will be required, but it will be recovered at the end of
the project's life. Revenues and cash operating costs are expected
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class life and will be depreciated by the MACRS depreciation
system, and it will have a positive pre-tax salvage value at the
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working capital will be required, but it will be recovered at the
end of the project's life. Revenues and cash operating costs are
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