Question
In: Accounting
Management of Baldwin Equipment Inc. is considering increasing the productivity of its plant. Management heard from...
Management of Baldwin Equipment Inc. is considering increasing the productivity of its plant. Management heard from suppliers that a certain piece of equipment could have an after-tax cash flow savings of more than $35,000 a year if it was installed in Baldwin’s plant. However, Jim Henderson, the controller of the company, is unsure whether the company should buy or lease the equipment. If the asset is leased for a 10-year period, it would cost the company $45,000 a year (before tax). The company’s income tax rate is 50%. If the company buys the asset, it would cost $300,000 and be financed entirely through debt for 10 years at a cost of 10%.The asset’s capital cost allowance is 25% (declining basis). On the basis of this information, Jim is now considering whether to purchase or lease the equipment. He is consid- ering doing a sensitivity analysis regarding the two options by modifying some of the data in the information presented above.
Question On the basis of the following, calculate the effect that each individual change would have on the decision.
Changes to the base case (the information given above) are as follows: • • • Capital cost allowance would be increased to 40%. The interest on the loan would be 8%. The company would be able to sell the asset for $50,000 in the tenth year.
Solutions
ekkarill92 answered 4 months agoRelated Solutions
Company Baldwin invested $41,740,000 in plant and equipment last year. The plant investment was funded with...
Company Baldwin invested $41,740,000 in plant and equipment last
year. The plant investment was funded with bonds at a face value of
$28,673,042 at 13.8% interest, and equity of $13,066,958.
Depreciation is 15 years straight line. For this transaction alone
which of the following statements are true?
Select: 5
On the Balance sheet, Long Term Debt changed by $28,673,042.
Since the new plant was funded with debt and equity, on the
Balance sheet Retained Earnings decreased by $13,066,958, the
difference...
Company Baldwin invested $21,700,000 in plant and equipment last year. The plant investment was funded with...
Company Baldwin invested $21,700,000 in plant and equipment last
year. The plant investment was funded with bonds at a face value of
$16,342,336 at 12.3% interest, and equity of $5,357,664.
Depreciation is 15 years straight line. For this transaction alone
which of the following statements are true?
a.Since the new plant was funded with debt and equity, on the
Balance sheet Retained Earnings decreased by $5,357,664, the
difference between the investment $21,700,000 and the bond
$16,342,336.
b. Cash was pulled...
A company is considering the purchase of a major piece of equipment for its manufacturing plant....
A company is considering the purchase of a major piece of
equipment for its manufacturing plant. The project would cost $22m
in initial investment and would result in cost savings, before tax,
of $3.25m per year for five years. The equipment could be sold for
$4.5m at the end of the five years. The equipment would also result
in an increase in NWC of $500,000, which will be recovered at the
end of the project. The company’s CCA rate is...
A company is considering the purchase of a major piece of equipment for its manufacturing plant....
A company is considering the purchase of a major piece of
equipment for its manufacturing plant. The project would cost $22m
in initial investment and would result in cost savings, before tax,
of $3.25m per year for five years.
The equipment could be sold for $4.5m at the end of the five
years. The equipment would also result in an increase in NWC of
$500,000, which will be recovered at the end of the project.
The company’s CCA rate is...
An Engineering company is considering purchasing a piece of plant equipment and wishes to compare its...
An Engineering company is considering purchasing a piece of
plant equipment and wishes to compare its replacement strategies
for purchase and maintenance over a period of time. The machine’s
initial cost is $170,000 with immediate payment required. Running
Costs including maintenance are $12,000 in year 1, $17,000 in year
2, $24,000 in year 3 and $33,000 in year 4. Payments are required
at the end of each year. Interest rates are 4% p.a. The equipment
will have a salvage value...
A mine is considering the installation of automated equipment in its processing plant to reduce labour...
A mine is considering the installation of automated equipment in
its processing plant to reduce labour costs from:
$300,000 to $220,000 in year 1, from
$330,000 to $240,000 in year 2, from
$360,000 to $260,000 in year 3, and from $400,000 to $290,000 in
year 4.
The equipment will cost $200,000 now with an expected salvage value
of $50,000 in four years. The minimum rate of return is 20%. Use
IRR and NPV analysis to determine if the equipment should...
Bernie Ltd is considering the purchase of a new equipment for its manufacturing plant and has...
Bernie Ltd is considering the purchase of a new equipment for
its manufacturing plant and has asked you to work out an
appropriate discount rate to use when evaluating the project.
information about burnie’s current capital structure is as
follows:
Source of capital. Book value. Market value
debts. $1,500,000. $1,600,000
ordinary share capital. $1,800,000. $3,000,000
total. $3,300,000. $3,600,000
to finance the purchase, Bernie can sell 10 year-bonds paying
annual coupon interest at a rate of 6%. The bond can be...
An Engineering company is considering purchasing a piece of plant equipment and wishes to compare its...
An Engineering company is considering purchasing a piece of
plant equipment and wishes to compare its replacement strategies
for purchase and maintenance over a period of time. The machine’s
initial cost is $160,000 with immediate payment required. Running
Costs including maintenance are $11,000 in year 1, $16,000 in year
2, $23,000 in year 3 and $32,000 in year 4. Payments are required
at the end of each year. Interest rates are 4% p.a. The equipment
will have a salvage value...
The Baldwin company wants to decrease its plant utilization for Brat by 15%. How many units...
The Baldwin company wants to decrease its plant utilization for
Brat by 15%. How many units would need to be produced next year to
meet this production goal? Ignore impact of accounts payable on
plant utilization.
Select: 1
1,202
1,952
1,683
1,414
Brat
growth rate 11%%
units sold 1,926
inventory 351
capacity next round 1,794
plant utilization 127%
A buffet restaurant is considering increasing its current price for its luncheon buffet from $10 to...
A buffet restaurant is considering increasing its current price
for its luncheon buffet from $10 to $12. But first it wants to
estimate, with 95% confidence, the true average cost of food eaten
per customer. To estimate this, it randomly selected 25 customers
eating lunch at its restaurant and determined how much it cost for
food for each of these customers. Based on this sample, it
calculated the average cost of food for these customers to be $6.75
and the...
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