Question
In: Finance
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 25% and the corporate tax rate is 34%. The company’s target capital structure is 70% equities and 30% debt. The cost of equity is 12% while the cost of debt before tax is 5%. The WACC is 9.39%. Step 1: Initial cost - $22m + $50,000 = 22,050,000 -22,050,000 Step 2: Cost savings = 3.25m(1-.34) = $2.145m + 8,259,500 PV of cost savings = + 4,494,158 N=5, i=9.39, PMT=2.145 PV = 8.2595 + 2,905,000 Step 3; Calc PVCCATs Using formula = 4.494.158 NPV = -6,391,342 Step 4: Calc PV of terminal CFs 4.5m + 50,000 = 4,550,000 PV = N=5, FV=4.55, i=9.39 Do not proceed. Calc PV=2.905m How did they get these numbers?
Solutions
Expert Solution
SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE
JUST WRITTEN IN EXCEL, NO EXCEL FUNCTION IS USED
PVIFA AND PV IF FORMULAS SHOWN
PLEASE MAKE IT CLEAR AS TO WORKING CAPITAL = 500000 OR 50000
SUM SAYS 500000
jeff jeffy answered 1 year agoRelated Solutions
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 piece of equipment used in a manufacturing plant that costs 220,000 to purchase has the...
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questions that follow the data.
Period
1
2
3
4
5
Operating Cost
45,000
56,000
70,000
85,000
98,000
Market Value
160,000
125,000
105,000
45,000
15,000
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6)
Company is considering the
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The projected cost of the equipment is
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The equipment will be depreciated via the MACRS - 5
year life
This equipment is expected to generate the
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Revenue will increase by
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Revenue Expense
Year 0 -
$1,500,000 (investment)
...
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